Which financial statement includes the accounting equation?

The balance sheet is the financial statement that explicitly reflects the accounting equation, which is Assets = Liabilities + Equity. This equation illustrates the relationship between a company's assets, its obligations (liabilities), and the owners' interest in the company (equity). In a balance sheet, these elements are organized into two main sections: assets are listed on one side, while liabilities and equity are presented on the other, confirming that the two sides are always in equilibrium according to the accounting equation.

In contrast, the income statement focuses on a company’s revenues and expenses over a period of time, showing profitability rather than the overall financial position. The cash flow statement provides insights into cash inflows and outflows, detailing operational, investing, and financing activities, but does not illustrate the overall financial position or the accounting equation. The statement of retained earnings shows changes in retained earnings during a period but does not encapsulate the complete financial position of the entity in relation to assets, liabilities, and equity. Therefore, the balance sheet is the only financial statement that directly embodies the accounting equation, making it the correct answer.