Which statement is true regarding the relationship between assets and liabilities?

The statement highlighting that assets can be less than liabilities depending on the equity accurately reflects the relationship encapsulated in the accounting equation, which is Assets = Liabilities + Equity. This equation shows that equity represents the residual interest in the assets of an entity after deducting liabilities.

When a business has more liabilities than assets, this can happen during periods of financial distress or operating at a loss, leading to negative equity. This scenario is not uncommon for startups or companies facing tough economic challenges. In such cases, the equation still holds, with total liabilities surpassing total assets, resulting in negative equity.

This understanding of the accounting equation is vital for recognizing how financial health is portrayed in the balance sheet and how equity serves as a buffer between assets and liabilities. The relationship illustrates the importance of managing both assets and liabilities effectively to sustain healthy financial operations.