Georgia Assessments for the Certification of Educators GACE Practice Test

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Which of the following correctly summarizes the accounting equation for a sole proprietorship?

Assets = Liabilities + Owners' equity
Liabilities = Assets + Owners' equity
Owner's equity = Assets + Liabilities
Revenue = Assets - Liabilities

The correct answer is: Assets = Liabilities + Owners' equity

This equation represents the fundamental principle of accounting, known as the accounting equation. It shows the relationship between a company's assets (what it owns), liabilities (what it owes), and owners' equity (the difference between the two). In a sole proprietorship, the owner's equity is equal to the assets minus the liabilities. This means that the owner's investment in the company (assets) must be equal to the sum of its debts (liabilities) and the remaining value of the company (owners' equity). This ensures that the company's balance sheet remains balanced. The other options are incorrect as they do not accurately portray the relationship between assets, liabilities, and owners' equity in a sole proprietorship. Option B and C have the relationship between assets and liabilities reversed, while option D includes revenue which is not a part of the basic accounting equation. Therefore, option A is the correct answer.