What is the fundamental accounting equation?

• A. Assets = Liabilities + Stockholders' Equity
• B. Revenues = Expenses
• C. Assets = Revenues - Expenses
• D. Cash flows = Financing activities

Answer: (A)

Resources owned by the company must be funded by claims from outside creditors or by the owners themselves. This idea is expressed in the equation where assets equal the sum of liabilities and stockholders’ equity. It means every asset is financed either by borrowing or by owners’ investment and retained earnings, and this balance holds after every transaction, which is the essence of double-entry bookkeeping.

Think of it this way: if you borrow cash, assets go up and liabilities go up by the same amount. If owners invest cash, assets go up and stockholders’ equity goes up by the same amount. When the company earns income, that increases stockholders’ equity through retained earnings, and expenses reduce it, but the overall equation stays balanced because those changes flow into equity.

Other options mix up income statement items with the balance sheet or treat a subset of cash flows as the whole, which isn’t how financial statements balance.