What is the equation that represents the relationship between assets, liabilities, and stockholders' equity?

The equation that represents the relationship between assets, liabilities, and stockholders' equity is foundational to accounting and is derived from the accounting equation. The correct formulation is that assets equal liabilities plus stockholders' equity. This reflects the principle that all the resources owned by a company (assets) are either financed by borrowing money (liabilities) or by the owner's contributions and retained earnings (stockholders' equity).

In a practical sense, this equation ensures that the balance sheet remains in balance, meaning that for every dollar of assets, there is a corresponding funding source either through debt or ownership equity. Thus, if a company has assets that exceed its liabilities, the difference represents the value of the equity held by shareholders, conveying the net worth of the company.

This clear structure is crucial for stakeholders, including investors and creditors, as it provides insights into the financial health and stability of the organization. By adhering to this equation, accountants can ensure the integrity and accuracy of the financial statements, thus facilitating informed decision-making.

In summary, this equation encapsulates the essence of a company's financial structure, representing the fundamental balance between what a company owns, owes, and the residual claim of its owners.