Which statement describes the relationship between liabilities and equity in the balance sheet?

The correct answer reflects a fundamental accounting equation that is central to understanding a balance sheet. The equation states that assets are equal to the sum of liabilities and equity. When rearranged, this equation reveals that equity is indeed calculated as assets minus liabilities. This means that equity represents the residual interest in the assets of a company after all liabilities have been settled.

Understanding this relationship is crucial for analyzing a company's financial health. When liabilities increase without a corresponding increase in assets, equity decreases, indicating that creditors have more claim over the company's assets than the owners do.

The other statements do not accurately describe the relationship: for instance, liabilities being greater than equity is not a universal truth and depends on specific circumstances, while saying equity increases when liabilities increase can mislead one about the actual dynamics, as increases in liabilities can actually lower equity if assets do not grow proportionally. Lastly, while liabilities are indeed part of the overall financial picture, they are not directly described as "a part of net assets," which would also involve consideration of equity. Therefore, the statement that equity is equal to assets minus liabilities accurately captures the essence of how these components interact on the balance sheet.