SAP Business One Certification Practice Exam

What is the formula for total assets?

1. Total liabilities + equity

2. Total liabilities - equity

3. Total liabilities x equity

4. Total liabilities ÷ equity

The correct answer is: Total liabilities + equity

The formula for total assets is derived from the accounting equation, which states that assets equal liabilities plus equity. This foundational concept in accounting reflects the organization's financial position, showing that what a company owns (assets) is financed either through borrowing (liabilities) or through the owners' investment (equity). In this case, total assets represent everything that the company possesses that has economic value, which must be balanced by the company's obligations (liabilities) and the residual interest of its owners (equity). Thus, when total liabilities are added to equity, the total accurately reflects the assets that the business owns. This relationship is crucial for ensuring that the balance sheet remains balanced, adhering to the principle that Assets = Liabilities + Equity. The other options do not align with this fundamental equation. Subtracting equity from liabilities, multiplying them, or dividing them does not accurately represent the relationship between assets, liabilities, and equity in accounting. Instead, they could lead to misconceptions about the company's financial position.