The balance sheet equation states that assets = liabilities owners’ equity. Which of the following best describes the logic behind this equation?

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BlackTom AI · Accepted Answer

The question asks for the logic behind the balance sheet equation, which is stated as assets = liabilities + owners’ equity. 
Option: 'Assets have to be financed by either other people’s money or the owner’s money.' This statement captures the essential idea that the resources a company owns (assets) must come from a funding source. In accounting terms, those sources are either liabilities (money owed to external parties, i.e., other people’s money) or the owner’s equity (the owner’s funds invested in the business).
Next, consider what the equation implies: every asset must have a financing claim against it, either from creditors or from owners. That is why the two sides balance: what the firm owns corresponds to claims by others or by the owners.
A potential misconception to avoid: some people think expenses or revenues drive the equation directly, but they do not change the fundamental financing source of assets; they affect equity over time through retained earnings, which is still part of owners’ equity. 
In summary, the option aligns with the core principle of double-entry accounting: assets are funded by external debt (liabilities) or owner-provided funds (owners’ equity).

MSB-250-300-002 Topic 2 Quiz

The balance sheet equation states that assets = liabilities owners’ equity. Which of the following best describes the logic behind this equation?

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