CSLB Law & Business ExamBusiness FinancesEasy
A contracting company has total assets of $500,000 and total liabilities of $300,000. What is the owner's equity?
- A$300,000
- B$500,000
- C$200,000
- D$800,000
Show answer & explanationAnswer & explanation
Correct answer: C. $200,000
The accounting equation states that Assets = Liabilities + Owner's Equity. Therefore, Owner's Equity = Assets - Liabilities. So, $500,000 (Assets) - $300,000 (Liabilities) = $200,000.
Why the other options are wrong
- A. This is the total liabilities.
- B. This is the total assets.
- D. This is the sum of assets and liabilities, which is incorrect.
Owner's Equity (Accounting Equation)
The owner's residual claim on the assets of the business after all liabilities have been paid. It represents the owner's investment in the business plus accumulated earnings.
- Part of the fundamental accounting equation: Assets = Liabilities + Owner's Equity.
- Also known as shareholder's equity or net worth.
- Increases with owner contributions and net income; decreases with owner withdrawals and net losses.
Memory trick: Assets = Liabilities plus Equity, always balanced!