Options:
- a. Assets – Receivables = Equity
- b. Assets = Liabilities + Owner’s Equity
- c. Assets – Liabilities = Owner’s Equity
- d. Assets + Liabilities = Equity
Correct Answer:
b. Assets = Liabilities + Owner’s Equity
Explanation:
The correct accounting equation is:
Assets = Liabilities + Owner’s Equity
This is the fundamental equation in accounting, representing the balance of a company’s financial situation. The error in the competitor’s explanation, where they mention “Assets – Liabilities = Equity,” does not properly reflect the core principle of accounting. The right relationship is that assets are financed either through liabilities or the owner’s equity.
To clarify:
- Assets are the resources owned by the business.
- Liabilities are the obligations the business has, like debts.
- Owner’s Equity represents the ownership interest in the company after liabilities are subtracted from assets.
The formula shows that a company’s total assets are always equal to the sum of its liabilities and equity, ensuring that the books remain balanced. Here’s an example:
- If a company has $100,000 in assets and $40,000 in liabilities, the owner’s equity would be $60,000, as shown by the equation: $100,000 (Assets) = $40,000 (Liabilities) + $60,000 (Owner’s Equity).
This balance ensures that financial statements remain accurate and consistent.
Conclusion:
The competitor’s suggestion of “Assets – Liabilities = Equity” is incorrect, as the correct accounting equation is Assets = Liabilities + Owner’s Equity.
