- a. The equation monitors the legal agreements made with creditors and what is owed to them at any point in time.
- b. The owners’ rights are equal to the creditors’ rights.
- c. The equation may sometimes be out of balance at the end of a year.
- d. The total of everything owned by a business must always equal the total of what the business owes to creditors and owners.
Correct Answer:
d. The total of everything owned by a business must always equal the total of what the business owes to creditors and owners.
Explanation:
The accounting equation is the fundamental principle of double-entry accounting. It states that:
- Assets = Liabilities + Owners’ Equity
This means that everything the business owns (assets) must be financed by either what it owes (liabilities) or the owner’s investment (equity). The equation ensures the financial records are balanced and reflects the company’s true financial position.
Why Other Answers are Incorrect:
- a. The equation monitors the legal agreements made with creditors and what is owed to them at any point in time.
This statement is only partially true, but it does not fully capture the essence of the accounting equation. The equation is not just about monitoring debts to creditors but ensuring overall balance between assets, liabilities, and equity. - b. The owners’ rights are equal to the creditors’ rights.
This is not correct, as creditors and owners have different types of rights. Creditors have claims to the business’s assets in the form of liabilities, while owners have residual claims after liabilities are paid off. - c. The equation may sometimes be out of balance at the end of a year.
This is incorrect. The equation must always balance. If it is out of balance, it indicates errors in recording or accounting entries.
