Owner’s equity represents the residual interest in a company’s assets after deducting liabilities. It is a fundamental concept in financial accounting, reflecting the net worth of a business.
Formula:Owner’s Equity=Assets−Liabilities\text{Owner’s Equity} = \text{Assets} - \text{Liabilities}Owner’s Equity=Assets−Liabilities
Represents the True Value of Ownership – It measures the owner's claim on the business after settling all obligations.
Directly Tied to the Accounting Equation – Assets=Liabilities+Owner’s Equity\text{Assets} = \text{Liabilities} + \text{Owner’s Equity}Assets=Liabilities+Owner’s Equity Rearranging the equation: Owner’s Equity=Assets−Liabilities\text{Owner’s Equity} = \text{Assets} - \text{Liabilities}Owner’s Equity=Assets−Liabilities
Commonly Used in Financial Statements – Found in the Balance Sheet under the "Equity" section.
B. Total assets – Incorrect because assets include both owner-financed and liability-financed resources.
C. Total liabilities – Incorrect because liabilities represent debts owed, not ownership value.
D. Owner’s contribution plus drawings – Incorrect because it only considers investments and withdrawals, not retained earnings or net assets.
IIA’s GTAG on Business Financial Management – Discusses financial statement analysis, including owner’s equity.
COSO’s Internal Control – Integrated Framework – Highlights financial reporting accuracy, including equity calculations.
IFRS & GAAP Accounting Standards – Define owner’s equity as assets minus liabilities in financial reporting.
Why Option A is Correct?Why Not the Other Options?IIA References:
