What is the basic accounting equation?

The basic accounting equation illustrates the fundamental relationship between a company's assets, liabilities, and equity. It states that the total value of assets owned by a business is always equal to the sum of its liabilities and equity. This equation is foundational to double-entry accounting, ensuring that every financial transaction affects at least two accounts in a way that maintains the balance.

Assets represent everything that a company owns, which can include cash, inventory, property, and equipment. Liabilities are the company's obligations or debts that it owes to creditors. Equity represents the owner's claim after liabilities have been deducted from assets.

This equation emphasizes that the resources controlled by the company (assets) are financed either by borrowing (liabilities) or through the owner's investments (equity). It provides a clear snapshot of the financial health of the business and is essential for financial reporting and analysis.

The other options reflect different accounting principles or relationships but do not accurately define the core accounting equation that must always hold true in financial reporting.