Which of the following relationships is/are correct:
I. change in assets + change in liabilities = change in equity.
II. change in retained earnings = net income + dividends paid.
III. assets - liabilities = retained earnings + contributed capital.
IV. assets = liabilities + revenues - expenses.
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A. B. C. D.B
The basic accounting equation is Total assets = Total liabilities + Total Equity. In I & II, the "plus" should be "minus."
Let's analyze each relationship one by one:
I. change in assets + change in liabilities = change in equity.
This relationship is based on the fundamental accounting equation, which states that assets equal liabilities plus equity. The change in assets represents the net increase or decrease in the total assets of a company over a given period. The change in liabilities represents the net increase or decrease in the total liabilities of a company over the same period. The change in equity represents the net increase or decrease in the total equity of a company over the same period. Therefore, the relationship is correct, and I is true.
II. change in retained earnings = net income + dividends paid.
Retained earnings are the accumulated profits of a company that are not distributed to shareholders as dividends. Net income is the excess of revenues over expenses for a given period, representing the profitability of the company. Dividends paid are the amount of money distributed to shareholders. The change in retained earnings can be calculated by adding net income and subtracting dividends paid from the beginning retained earnings balance. Therefore, the relationship is correct, and II is true.
III. assets - liabilities = retained earnings + contributed capital.
This relationship is incorrect. Assets represent the resources owned by a company, while liabilities represent the company's obligations or debts. Retained earnings, as mentioned earlier, are the accumulated profits that have not been distributed to shareholders. Contributed capital, on the other hand, represents the amount of capital contributed by shareholders. The equation should be assets = liabilities + equity (which includes retained earnings and contributed capital), not assets - liabilities = retained earnings + contributed capital. Therefore, the relationship is incorrect, and III is false.
IV. assets = liabilities + revenues - expenses.
This relationship is also incorrect. Assets represent the resources owned by a company, while liabilities represent the company's obligations or debts. Revenues are the inflows of assets resulting from the company's primary activities, while expenses are the outflows of assets incurred to generate those revenues. The equation should be assets = liabilities + equity (which includes retained earnings and contributed capital), not assets = liabilities + revenues - expenses. Therefore, the relationship is incorrect, and IV is false.
Based on the analysis above, the correct relationships are I and II. Therefore, the correct answer is D. II & III.