What does the accounting equation state?

The accounting equation is a fundamental principle of accounting that depicts the relationship between a company’s assets, liabilities, and equity. The correct representation is that assets equal liabilities plus equity. This reflects that what a company owns (assets) is financed either by borrowing money (liabilities) or by the owners’ investments (equity).

In the equation, assets represent everything a company owns that has value, liabilities represent what the company owes to others, and equity represents the residual interest in the assets of the entity after deducting liabilities. Therefore, the correct formulation is that the total of assets must always balance with the total of liabilities and equity combined, illustrating the financial health and structure of the business.

This understanding helps in analyzing financial statements, as it shows how the different components interact with one another and ensures that the company's books remain balanced. It highlights that for every asset a company has, there is an equal amount of liability and equity backing it.