Which Of The Following Statements Is The Correct Definition Of Owner's Equity?
Assets = Liabilities + Owner’s Equity
Owner’s Equity = Assets - Liabilities
We get Owner’s equity after deducting all the liabilities (claims / rights of outsiders against assets) from assets.
A sole owner / proprietor is the person who invested into the business by
assets such cash, equipment, property, goods, etc., to start the business to
earn profits from profitable activities. Such initial investment (Capital)
gives the business, assets in the form of cash or goods against which the
proprietor has rights to claim from the business known as owner’s equity. The
journal entry to record is to debit a cash, equipment and purchases account /
inventory account (if cash, equipment and goods are invested) and a credit to owner’s
capital account which represents owner’s equity in the business against assets
of the business. During the accounting period, he may make additional
investment into his business in order to stabilize and grow it. This additional
investment made may be either due to increase in profits or he has cash or other
assets and wants to invest further into the business.
The option A is incorrect choice here as it represents Expenses which are
deducted from owner’s equity in the right side of accounting equation. Expenses
are necessary to operate the daily business operations in order to earn
revenues, which are added to Owner’s Equity in the right side of accounting
equation, from these business operations.
The option B is also wrong as this statement is suitable for Liabilities.
The option D is wrong option here as it is the definition of Assets of the business.
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