Question

Why does the combined total of the company’s liabilities and equity always equal the total of the company’s assets?

a) Because liabilities represent the claims of creditors, and equity represents the claims of owners.
b) Because assets are financed by a combination of debt and equity.
c) Because the accounting equation requires the balance of assets, liabilities, and equity.
d) Because liabilities and equity are both classified as assets on the balance sheet.

Answer 1

The total of a company's assets always equals the combined total of its liabilities and equity due to the principles of accounting that dictate assets are financed by debts and owners' investments, aligning with the accounting equation.

Step-by-step explanation:

The combined total of the company's liabilities and equity always equals the total of the company's assets because liabilities represent the claims of creditors, and equity represents the claims of owners (a), assets are financed by a combination of debt and equity (b), and the fundamental accounting equation requires the balance of assets, liabilities, and equity (c). This balancing reflects the principle that all of the company's resources (assets) are provided by creditors and investors (liabilities and equity), thus maintaining equilibrium in the balance sheet. This is illustrated in a bank's T-account where the assets on one side are always equal to the sum of liabilities and net worth on the other side. Assets include cash reserves, loans made, and securities, while liabilities include deposits and other debts owed.