What is the relationship between assets, liabilities, and equity as per the accounting equation?

The correct relationship is grounded in the fundamental accounting equation, which states that assets are financed by liabilities and equity. This equation can be expressed as Assets = Liabilities + Equity.

In the context of the option selected, rearranging the equation allows us to express equity in terms of assets and liabilities. By rearranging to isolate equity, we can subtract liabilities from both sides, resulting in Assets - Liabilities = Equity. This shows that equity represents the residual interest in the assets of the entity after deducting liabilities.

This equation illustrates that equity is what's left for the owners after all debts have been settled, highlighting the relationship and balance among the three components within the financial statements. It underscores the foundational principle of accounting that ensures an entity's financial position is accurately represented.