Define the accounting equation.

The accounting equation is a fundamental principle in accounting that expresses the relationship between a company's assets, liabilities, and equity. It states that assets must always equal the total of liabilities and equity, which reflects the notion that everything a company owns (its assets) has been financed either by borrowing money (liabilities) or by the owner's investment (equity).

When examining this equation, each component plays a crucial role in a company's financial health. Assets are the resources owned by the business, such as cash, inventory, and equipment. Liabilities are the company's obligations to outside parties, such as loans and payables. Equity represents the owner's claims against the company's assets after all liabilities have been settled.

This relationship ensures that the accounting equation is always in balance because any increase or decrease in assets must be matched by a corresponding increase or decrease in liabilities or equity. Thus, the correct expression of the accounting equation is that the total assets of a business equal the sum of its liabilities and equity.