Question

Which one of the following correctly represents one of the basic financial statement models?

1) Assets - Liabilities = Net Income
2) Assets - Liabilities = Owners' Equity
3) Revenues + Expenses = Net Income
4) Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Answer 1

The basic financial statement models 2) Assets - Liabilities = Owners' Equity

Step-by-step explanation:

The correct representation of one of the basic financial statement models is Assets - Liabilities = Owners' Equity. This equation is based on the fundamental accounting equation, which states that the total assets of a business are equal to the sum of its liabilities and owners' equity.

Assets are what a company owns, liabilities are what it owes, and owners' equity represents the residual interest of the owners in the business after deducting liabilities from assets. Therefore, the equation Assets - Liabilities = Owners' Equity reflects the basic accounting principle that the assets of a company are financed by a combination of liabilities and owners' equity.

This formula serves as the foundation for preparing the balance sheet, one of the primary financial statements. The balance sheet provides a snapshot of a company's financial position at a specific point in time by presenting its assets, liabilities, and owners' equity.

In summary, the correct representation of one of the basic financial statement models is 2) Assets - Liabilities = Owners' Equity, aligning with the accounting equation and serving as a key element in constructing the balance sheet.