What is the correct accounting identity equation?

The correct accounting identity equation is that assets equal liabilities plus equity. This fundamental principle is foundational in accounting and represents the relationship between what a company owns, what it owes, and the ownership interest in the assets.

In financial terms, assets are resources that a company controls and can use to generate future economic benefits. Liabilities represent the obligations or debts that the company must settle in the future, while equity reflects the residual interest of the owners in the assets after deducting liabilities.

This equation helps maintain the balance in the accounting system, signifying that all resources (assets) are financed either through borrowing (liabilities) or through the owner's equity. It is a reflection of the double-entry accounting system, where every financial transaction affects at least two accounts, ensuring that the financial statements remain balanced.

Understanding this identity is crucial for analyzing a company's financial health, as it lays the groundwork for constructing balance sheets and interpreting financial data.