In a balance sheet, which equation represents the relationship between assets, liabilities, and owners' equity?

• A. Net worth equals Assets
• B. Liabilities = Assets + Owners Equity
• C. Assets = Liabilities + Owners Equity
• D. Assets + Liabilities = Owners Equity

Answer: (C)

Assets must be funded either by what the business owes (liabilities) or by the owner's stake (owners' equity). That relationship is captured by the equation: Assets = Liabilities + Owners' Equity. This keeps the balance sheet in balance because every resource owned has a corresponding funding source on the other side. For example, when the owner contributes cash, assets rise and owners' equity rises by the same amount. When a loan is taken to buy something, assets rise and liabilities rise by the same amount. The other statements don’t reflect this balance: net worth is about owners' equity, not total assets; liabilities cannot equal assets plus owner’s equity; and equity is not the sum of assets and liabilities.