Question

Which of the following best describes why the left and right sides of a balance sheet are equal?

a.The assets must equal liabilities plus stockholders equity, because stockholders equity is the difference between the assets and the liabilities.
b.By accounting convention the assets of a company must be equal to the liabilities of the company
c.By definition the assets plus the liabilities will be the same as the stockholders equity.
d.In a properly run business, the value of liabilities will not exceed the assets held by the company.

Answer 1

The assets must equal liabilities plus stockholders equity, because stockholders equity is the difference between the assets and the liabilities.

Step-by-step explanation:

The left and right sides of a balance sheet are equal because assets must equal liabilities plus stockholders' equity. Stockholders' equity represents the difference between assets and liabilities. In other words, it is the residual claim of the owners of the business after deducting liabilities from assets.

For example, if a company has $100,000 in assets and $50,000 in liabilities, the stockholders' equity would be $50,000 ($100,000 - $50,000 = $50,000).

Therefore, option a. "The assets must equal liabilities plus stockholders equity, because stockholders equity is the difference between the assets and the liabilities" best describes why the left and right sides of a balance sheet are equal.