Utah Contractor Practice Exam

What is the equation that summarizes the relationship between assets, liabilities, and owner's equity?

1. Assets = Liabilities + Owner's Equity

2. Assets + Liabilities = Owner's Equity

3. Liabilities = Assets - Owner's Equity

4. Owner's Equity = Liabilities + Assets

The correct answer is: Assets = Liabilities + Owner's Equity

The equation that summarizes the relationship between assets, liabilities, and owner's equity is expressed as Assets = Liabilities + Owner's Equity. This fundamental equation is known as the accounting equation and forms the basis of double-entry bookkeeping. In this equation, assets represent everything that a company owns and can use to generate revenue, such as cash, inventory, and property. Liabilities refer to what the company owes to others, including loans and payables. Owner's equity, also known as net worth, represents the residual interest in the assets of the entity after deducting liabilities. By maintaining this balance, the equation ensures that all financial resources are accounted for, illustrating that the total value of a company's resources (assets) is financed either by borrowing money (liabilities) or through the owner's investment (owner's equity). Thus, the correct answer reflects this critical foundational principle in financial accounting.