What is the Balance Sheet equation?

The Balance Sheet equation represents the fundamental relationship between a company's resources and the claims against those resources. The correct formulation is Assets = Liabilities + Stockholder Equity.

This equation illustrates that what a company owns (assets) is financed either by borrowing money (liabilities) or by the owners' investments (stockholder equity). Essentially, it reflects that all resources a company controls are funded either through debt or through shareholder investment. When preparing a balance sheet, this equation must always hold true, ensuring that a company's financial position is accurately represented.

On the contrary, the other options do not pertain to the Balance Sheet. The first option incorrectly rearranges the equation by placing assets on one side and combining liabilities and equity on the opposite side. The third option describes the calculation of net income, which is a part of the income statement, not the balance sheet. Lastly, the fourth option refers to retained earnings, which is part of the equity section but does not represent the overall equation of the balance sheet.