Which of the following best describes the relationship between assets, liabilities, and members' equity on a balance sheet?

• A. Assets = Liabilities + Members' Equity.
• B. Assets = Liabilities - Members' Equity.
• C. Assets + Liabilities = Members' Equity.
• D. Assets - Liabilities = Revenue.

Answer: (B)

Assets on a balance sheet are funded by what the organization owes (liabilities) and by the owners’ stake (members’ equity). The fundamental relationship is that assets equal liabilities plus members’ equity. You can also see this as assets minus liabilities equals Members’ Equity, which is just another way of expressing the same balance. Saying assets equal liabilities minus members’ equity would misstate how the funds are provided, since equity isn’t a deduction from liabilities. Revenue, meanwhile, affects equity over time but belongs on the income statement, not in this balance-sheet equation.