Question

The Balance Sheet Identity as expressed by the accounting discipline is Assets = Liabilities + Shareholder’s Equity. From the perspective of finance, the Balance Sheet Identity is best expressed as:

A. Assets – Shareholders Equity = Liabilities
B. Assets + Liabilities = Shareholders Equity
C. Liabilities + Shareholder’s Equity = Assets
D. Shareholders Equity = Assets - Liabilities
E. Sales - Net Income = Costs

Answer 1

The finance perspective of the Balance Sheet Identity, which is composed of Assets, Liabilities, and Shareholder's Equity, is best represented by option D, 'Shareholders Equity = Assets - Liabilities', indicating the net worth of the entity after liabilities are deducted.

Step-by-step explanation:

The correct finance perspective of the Balance Sheet Identity is expressed as Assets = Liabilities + Shareholder’s Equity. However, from the options provided, the one that best represents this identity from a financial view, rearranged, is Shareholders Equity = Assets - Liabilities, which corresponds to option D. This equation indicates that shareholders' equity is essentially the residual interest in the assets of the entity after deducting liabilities, which can be thought of as the net worth. A bank's balance sheet helps to illustrate this concept: the assets might include cash and loans made by the bank, while liabilities could be customer deposits. The net worth, or bank capital, is the value of assets minus the liabilities.