Which equation reflects the correct accounting model?

The foundational accounting model is represented by the equation where assets equal the sum of liabilities and owners' equity. This equation illustrates the relationship between a company's resources (assets) and the claims against those resources (liabilities and owners' equity).

In this model, assets encompass what a company owns, such as cash, inventory, property, and equipment. Liabilities represent obligations or debts the company owes to external parties, while owners' equity reflects the owners' claims on the company's assets after all liabilities have been settled. This structure is critical because it shows that all resources financed either through debt or equity must balance out to the total assets attributed to the company's operations.

Understanding this equation is essential for identifying financial health and stability within a business. For example, if a company has significant liabilities but limited equity, it could be a signal of potential financial distress. This equation serves as the basis for double-entry bookkeeping, ensuring that every financial transaction keeps the accounting equation balanced.