Which one of the following is the correct Accounting Equation?

Correct option is D

The Accounting Equation is the foundation of financial accounting and follows the rule:

Assets = Liabilities + Capital

This equation means that a company's resources (assets) are financed through either external liabilities (debts, creditors, etc.) or internal funds (capital/owner's equity).

To find Liabilities, we rearrange the equation:

Liabilities = Assets – Capital

Since this matches option (4), it is the correct answer.

Example:

If a company has:

• Assets = ₹1,00,000

• Capital = ₹70,000

Then, using the formula:

Liabilities = 1,00,000 – 70,000 = ₹30,000

This means the company has ₹30,000 as liabilities (borrowings, payables, etc.).

Information Booster:

• The accounting equation always maintains balance in financial statements.

• Assets include cash, inventory, machinery, buildings, etc.

• Liabilities include loans, creditors, and outstanding expenses.

• Capital represents the owner's investment and retained earnings.

• Expanded Accounting Equation:
  Assets = Liabilities + Capital + Revenues – Expenses – Drawings

• Used in the balance sheet to analyze a company's financial health.

Additional Knowledge:

1. (1) Assets = Liabilities – Capital

   • Incorrect because capital is added to liabilities, not subtracted.

   • The correct equation is: Assets = Liabilities + Capital

2. (2) Capital = Assets + Liabilities

   • Incorrect because capital is calculated as: Capital = Assets – Liabilities

   • Liabilities reduce the owner's capital, they are not added to it.

3. (3) Liabilities = Capital + Assets

   • Incorrect because liabilities are derived by subtracting capital from assets.

   • The correct formula is: Liabilities = Assets – Capital​