State BPA Fundamental Accounting Practice Exam

Which financial statement represents the accounting equation?

1. Income Statement

2. Statement of Cash Flows

3. Balance Sheet

4. Statement of Retained Earnings

The correct answer is: Balance Sheet

The Balance Sheet is the financial statement that represents the accounting equation, which is Assets = Liabilities + Equity. This equation illustrates the relationship between what a company owns (assets), what it owes (liabilities), and the residual interest of the owners (equity). The Balance Sheet provides a snapshot of a company's financial position at a specific point in time, detailing all assets on one side and the corresponding liabilities and equity on the other. Understanding the accounting equation is fundamental since it forms the backbone of double-entry accounting and serves as the foundation for all financial reporting. The Balance Sheet is unique among financial statements in that it directly showcases how resources are financed, whether through borrowing or through owners' investments. This distinct characteristic is what makes the Balance Sheet a pivotal tool for analyzing a company's financial health and stability.