What equation is the balance sheet based on?

The balance sheet is fundamentally rooted in the equation that states Assets equal Liabilities plus Owner's Equity. This relationship is crucial because it reflects the company's financial position at a specific point in time. On one side, you have assets, which represent everything the business owns, such as cash, inventory, and property. On the other side, you have liabilities and owner's equity, where liabilities reflect what the business owes to external parties, and owner's equity demonstrates the owner's claim after all liabilities have been deducted from assets.

The balance sheet must balance, meaning the total of assets must always equal the total of liabilities and owner's equity. This equation provides a snapshot of a business’s financial health and is a vital part of financial reporting, as it illustrates how resources are financed, whether through debt (liabilities) or through contributions from owners (equity).

The other options presented pertain to different aspects of financial statements but do not reflect the foundational equation of the balance sheet. The equation for profits (revenue minus expenses) relates to the income statement rather than the balance sheet, while the statement involving current assets and current liabilities is more suited for understanding liquidity rather than the overall financial position. The last option about total revenue equating to total expenses characterizes profitability,