Which of the following is/are true?
I. Assets = Equity + Liabilities
II. Equity = Retained earnings + Dividends Payable
III. Assets + Liabilities = Equity
IV. Assets = Liabilities - Equity
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A. B. C. D.B
The basic accounting equation states that Assets = Liabilities + Owners' Equity.
The correct answer is B. I only.
Let's go through each statement one by one:
I. Assets = Equity + Liabilities This statement is known as the basic accounting equation or the balance sheet equation. It represents the fundamental principle of accounting that states that the total assets of a company are equal to the sum of its equity (also known as shareholders' equity or net assets) and liabilities. In other words, it suggests that the financing of assets is done through a combination of equity and liabilities. This equation is the foundation of double-entry bookkeeping and the preparation of financial statements. Therefore, Statement I is true.
II. Equity = Retained earnings + Dividends Payable Equity represents the residual interest in the assets of a company after deducting its liabilities. It is also referred to as shareholders' equity or net assets. Retained earnings, on the other hand, represent the accumulated profits of a company that have not been distributed to shareholders as dividends. Dividends Payable is a liability account that represents the dividends declared by a company but not yet paid. Statement II incorrectly suggests that equity is equal to the sum of retained earnings and dividends payable. In reality, equity includes various components such as share capital, additional paid-in capital, retained earnings, and other reserves. Therefore, Statement II is false.
III. Assets + Liabilities = Equity This statement is essentially a rearrangement of the basic accounting equation (Assets = Equity + Liabilities). By subtracting liabilities from both sides of the equation, we get Assets - Liabilities = Equity. Therefore, Statement III is true.
IV. Assets = Liabilities - Equity This statement is incorrect and does not follow the basic accounting equation. The correct equation is Assets = Equity + Liabilities (as mentioned in Statement I). In this equation, equity is added to liabilities to equal the total assets. Therefore, Statement IV is false.
In summary, Statements I and III are true, while Statements II and IV are false. Therefore, the correct answer is B. I only.