What is indicated by the accounting equation Assets = Liabilities + Capital?

The accounting equation, Assets = Liabilities + Capital, illustrates the foundational concept of double-entry bookkeeping by highlighting the relationship between a company's resources, its obligations, and the owner's equity in the business.

In this equation, assets represent everything the company owns, such as cash, inventory, and property. Liabilities encompass all debts and obligations the company must pay, while capital reflects the owner's equity or investments in the business. This relationship is crucial since it shows that a company's resources are financed either through borrowing (liabilities) or through investments by the owners (capital). This balance is essential for understanding a company’s financial position since it drives insights into how much is owned outright versus what is owed.

Other options do not comprehensively capture the essence of the accounting equation. While shareholders’ equity is indeed part of the equation, it does not equal liabilities—capital represents the difference after accounting for liabilities. The total assets of a company is a component of the equation rather than the entire relationship. Similarly, the statement regarding owner’s contributions focuses narrowly on one aspect of equity rather than the broader relationship illustrated in the equation.