Answer: C. In the Accounting Equation, assets are equal to Liabilities + Equity
The fundamental Accounting identity is given as :
<u>Assets = Liabilities + Equity
</u>
The left-hand side of the accounting identity indicates the total value of assets held by a business.
The right-hand side represents what the business owes to third party creditors and the shareholders of the company.
In the right hand side, Liabilities refer to the amounts a business owes third party creditors.
The amount a business owes to its shareholders is known as Equity.
We can also look at the accounting identity in another manner.
The share holders have invested some of their money in the business, so they’ve contributed funds to the business are can be viewed as a source of funds.
Liabilities refer to money owed by a business to other people. These liabilities can also be viewed as loans from persons other than shareholders that have to repaid.
So, liabilities are also sources of funds. In essence, the right-hand side of the accounting identity represents the sources of funds to the business.
The business uses these funds to invest in assets that are used during the course of the business. Hence the left-hand side of the accounting identity represents uses of funds.
