What is the fundamental accounting equation and how does it remain balanced?

• A. Assets = Liabilities + Owner's Equity; every transaction increases one side and decreases or increases the other to keep the equation in balance.
• B. Assets minus Liabilities equals Owner's Equity; balance is maintained by cash flow.
• C. Revenue equals Expenses plus Equity; accounts balance via debits and credits.
• D. Liabilities plus Revenue equal Assets; balance is maintained by adjusting entries.

Answer: (A)

Assets must always equal Liabilities plus Owner's Equity. This balance comes from double-entry bookkeeping: every transaction affects at least two accounts in opposite ways, so the equation stays in balance.

When you acquire something of value, like equipment, the change is mirrored somewhere else: if you pay cash, one asset increases while another asset decreases, leaving total assets the same; if you borrow to buy it, both assets and liabilities rise by the same amount, keeping the equation intact; if you earn revenue, assets rise (cash or receivables) and Owner’s Equity rises as well through retained earnings; and if you incur an expense, Owner’s Equity falls (through reduced net income) while assets may decrease. The crucial idea is that financing comes from either someone else (liabilities) or the owners (owner’s equity), so the total left side (assets) always equals the combined right side (liabilities plus equity).

The other statements mix components incorrectly: the fundamental relation is not assets minus liabilities; it’s assets equal to liabilities plus owner’s equity. Revenues and expenses affect equity, not a simple sum that makes assets equal something like revenue plus liabilities. And balance is not maintained just by cash flow or adjusting entries alone; those are methods that preserve the overall equality ensured by recording dual effects of every transaction.