Shep Company’s records show the following information for the current year.
Beginning of year
Total assets $ 50,000
Total liabilities $ 22,000
End of year
Total assets $ 80,000
Total liabilities $ 35,000
The Correct Answer and Explanation is:
✅ Correct Answer: $17,000 Increase in Owner’s Equity
🔍 Explanation
To determine the change in owner’s equity for Shep Company over the year, we apply the accounting equation:
Assets = Liabilities + Owner’s Equity
Rearranging, we find:
Owner’s Equity = Assets – Liabilities
This equation reflects the financial position of a business and shows that any increase or decrease in assets or liabilities directly affects owner’s equity—assuming no owner contributions or withdrawals are made during the year.
At the beginning of the year, Shep Company had assets of $50,000 and liabilities of $22,000. Using the equation:
- Owner’s Equity = $50,000 – $22,000 = $28,000
At the end of the year, assets increased to $80,000, and liabilities rose to $35,000:
- Owner’s Equity = $80,000 – $35,000 = $45,000
The difference in owner’s equity from the beginning to the end of the year is:
- Change = $45,000 – $28,000 = $17,000 increase
This $17,000 increase in owner’s equity indicates that Shep Company’s net worth grew during the year. This change could be attributed to various factors such as:
- Net income generated from business operations
- Additional capital invested by the owner
- A combination of profits and capital contributions, minus any withdrawals
Such a positive shift is a strong indicator of financial health. It suggests that the business was able to expand its assets faster than its liabilities, likely through profitable operations or increased investment.
Understanding the change in owner’s equity helps stakeholders assess the company’s performance, financial management, and long-term sustainability. It reflects the owner’s stake in the company and serves as a useful metric for evaluating how well the company is generating value over time.
