What does the basic equation of accounting state?

The basic equation of accounting is fundamentally expressed as assets equal the sum of liabilities and capital, which encapsulates the essence of double-entry bookkeeping. This equation is pivotal in financial accounting as it illustrates that what a business owns (assets) is financed either through debts (liabilities) or through the owner’s equity (capital).

When this equation holds true, it reflects the balance that must exist in accounting records. For example, if a business has total assets amounting to $100,000, and liabilities of $60,000, the owner’s equity or capital must then be $40,000 to satisfy the equation ( \text{Assets} = \text{Liabilities} + \text{Capital} ).

This understanding is crucial for maintaining accurate financial records and providing stakeholders with a clear view of the company's financial position. It highlights how every financial transaction impacts both sides of the equation, ensuring that the accounting system remains in balance.

Thus, the correct answer captures this foundational concept, reinforcing the relationship between assets, liabilities, and capital in the realm of accounting.