What is the balance sheet formula?

The balance sheet formula is foundational in accounting and reflects the relationship between a company's assets, liabilities, and owner's equity. The correct formula, Assets = Liabilities + Owner's Equity, illustrates that all the resources a company owns (assets) are financed either by borrowing money (liabilities) or by the owner's contributions (owner's equity).

In this equation, assets represent what the company controls and can use to generate revenue. Liabilities refer to what the company owes, such as loans and accounts payable. Owner's equity signifies the residual interest in the company's assets after deducting liabilities, representing the owner's stake in the business.

This relationship ensures that the balance sheet remains balanced, meaning that every financial transaction is accounted for, maintaining the integrity of the company's financial statements. This formula not only helps in reporting the company's financial position but also assists in analyzing its financial health, providing insight into its solvency and capital structure.