What is represented by the accounting equation?

The accounting equation is foundational to understanding the structure of a company's financial position, illustrating the relationship between assets, liabilities, and equity. The equation states that assets are always equal to the sum of liabilities and equity. This reflects the principle of double-entry accounting, where every financial transaction affects both sides of the equation, maintaining balance.

When a company acquires assets, it can either do so through borrowing (incurring liabilities) or through contributions from owners (increasing equity). Thus, liabilities and equity represent sources of funds that finance the assets owned by the company. Understanding this relationship is crucial for analyzing a business's financial health.

In contrast, the other options fail to accurately represent this fundamental relationship. They either mix up the components of the equation or introduce incorrect relationships not supported by accounting principles. This clarity in the accounting equation helps both accountants and stakeholders assess financial stability and operational efficiency.