If assets are $99,000 and liabilities are $32,000, then equity equals:
a. $32,000.
b. $67,000.
c. $99,000.
d. $131,000.
e. $198,000.
The correct answer and explanation is :
The correct answer is b. $67,000.
Explanation:
In accounting, the basic accounting equation is:
[
\text{Assets} = \text{Liabilities} + \text{Equity}
]
This equation is fundamental because it shows that the total value of assets owned by a company must be financed by either its liabilities (debts or obligations) or the equity invested by the owners (shareholders’ equity).
Step-by-step solution:
Given:
- Assets = $99,000
- Liabilities = $32,000
We need to find Equity. To do this, we can rearrange the accounting equation:
[
\text{Equity} = \text{Assets} – \text{Liabilities}
]
Substitute the given values:
[
\text{Equity} = 99,000 – 32,000 = 67,000
]
Therefore, the equity is $67,000.
Why this works:
- Assets represent everything the company owns, such as cash, inventory, buildings, and equipment.
- Liabilities represent everything the company owes, such as loans, accounts payable, or other financial obligations.
- Equity is the residual interest in the assets of the entity after deducting liabilities. In other words, it represents the owner’s claim on the business once all debts are settled.
The reason Equity is calculated by subtracting liabilities from assets is because liabilities represent what must be paid back to creditors, while equity represents what belongs to the owners after those obligations have been met. If a company has more assets than liabilities, the equity is positive, indicating value for the owners. Conversely, if liabilities exceed assets, the equity would be negative, indicating the company owes more than it owns.
In this case, with assets of $99,000 and liabilities of $32,000, the owners’ equity in the business is $67,000.