Equity is which of the following?

Equity is which of the following?

• A. The net worth of the business & the owner's share of the business
• B. The owner's salary
• C. The inventory value
• D. The profits earned this year

Answer: (A)

Equity represents the owner's claim on the business’s assets after all debts are paid. Put simply, it’s the net worth of the business—the owner's share of those net assets. This is why equity reflects what the business is worth to the owner if everything were sold and liabilities settled. Consider why the other options aren’t equity. An owner's salary is money paid to the owner and counted as an expense, not a claim on assets. The inventory value is an asset on the balance sheet, not the owner’s stake in the business. Profits earned this year increase retained earnings and, over time, can raise equity, but they are income for the period rather than the ownership interest itself.

Equity represents the owner's claim on the business’s assets after all debts are paid. Put simply, it’s the net worth of the business—the owner's share of those net assets. This is why equity reflects what the business is worth to the owner if everything were sold and liabilities settled.

Consider why the other options aren’t equity. An owner's salary is money paid to the owner and counted as an expense, not a claim on assets. The inventory value is an asset on the balance sheet, not the owner’s stake in the business. Profits earned this year increase retained earnings and, over time, can raise equity, but they are income for the period rather than the ownership interest itself.