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:
The basic accounting equation, which underlies the concept of double-entry accounting, is:
Assets = Liabilities + Equity
In this equation, assets represent what the company owns (such as cash, property, or equipment), liabilities represent what the company owes (like loans or accounts payable), and equity represents the owner’s interest in the company.
Given the information:
- Assets = $99,000
- Liabilities = $32,000
We can use the accounting equation to find the equity:
Equity = Assets – Liabilities
Substituting the given values:
Equity = $99,000 – $32,000
Equity = $67,000
Thus, the equity of the company is $67,000.
Understanding the Calculation:
- Assets are the total resources controlled by the company. In this case, they are valued at $99,000.
- Liabilities represent the financial obligations or debts of the company, which amount to $32,000 in this scenario.
- Equity is essentially what is left for the company’s owners after all liabilities are settled. It’s the residual value after subtracting liabilities from assets.
This value, $67,000, represents the net worth of the company, which is the owners’ stake or ownership interest in the business after accounting for all liabilities. It can also be seen as the value of the company that the owners have “earned” through their investments or contributions.
By adhering to the accounting equation, we ensure that the financial statements are balanced, and this principle applies universally to all companies. So, in this case, the equity is clearly $67,000, which corresponds to option b.