Arizona Contractors License Practice Exam

Which equation represents the balance sheet?

1. Assets = Liabilities + Shareholders' Equity

2. Assets = Liabilities - Owners' Equity

3. Assets + Liabilities = Owners' Equity

4. Assets = Owners' Equity + Expenses

The correct answer is: Assets = Liabilities + Shareholders' Equity

The balance sheet is fundamentally a financial statement that provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time. The correct equation that represents the balance sheet is that assets equal the sum of liabilities and shareholders' equity. This equation illustrates the financial position of a business by ensuring that all of its resources (assets) are financed either by borrowing money (liabilities) or by contributions from owners (equity). It highlights the relationship between what a company owns and how those assets are financed. The other options do not accurately depict this fundamental accounting principle. The alternative equations either misstate the relationships between these financial elements or use incorrect terminology, such as referencing expenses which do not belong in the balance sheet equation. Understanding this equation is crucial, as it forms the basis for financial analysis and ensures that the accounts are balanced according to the double-entry accounting system.