PSIA Accounting Practice Test

The Balance Sheet rests on the accounting equation: assets must be financed either by what the company owes (liabilities) or by the owners’ claim (owner’s equity). In other words, assets equal liabilities plus equity. This reflects that every resource a business owns comes from borrowing or from owner investment and retained earnings.

The other statements don’t hold on the balance sheet: revenues and expenses affect the income statement and, through net income, eventually change equity—but they don’t form the balance sheet’s fundamental equation; equity minus liabilities isn’t the correct relationship; and cash is just one asset, not the total of assets or a direct reflection of net income.