Question

The fundamental principle behind trust accounting is expressed as follows:

a. Assets=Accountibility (or Liabilities)
b. Liabilities=Accounts+Assets
c. Accounts=Assets+Liabilities
d. Assets=Liabilities+Capital

Answer 1

The fundamental principle behind trust accounting, particularly for a bank's balance sheet, is that Assets = Liabilities + Capital. This equation ensures a bank's financial stability by equating its assets to its obligations and net worth.

Step-by-step explanation:

The fundamental principle behind trust accounting is the equation that represents a firm's financial stability. In the context of a bank's balance sheet, this principle is encapsulated by the formula:

Assets = Liabilities + Capital

This equation reflects the core of accounting practices where assets represent what a bank owns or controls, liabilities indicate what the bank owes, and capital, or net worth, is the difference between assets and liabilities. In a T-account representation, the left side lists the bank's assets, including reserves, loans made, and government securities. The right side details the bank's liabilities, such as customer deposits, and includes the bank's net worth to ensure the two sides balance.

For a healthy bank, net worth will be positive, signifying that the bank is financially stable with assets exceeding its liabilities. Conversely, a negative net worth indicates a bankrupt or struggling institution. Always, the total assets must equal the total liabilities added to the bank's net worth.