In accounting terms, which statement best describes the relationship between net worth and owner's equity?

In accounting terms, which statement best describes the relationship between net worth and owner's equity?

• A. Net worth equals revenue
• B. Net worth equals owner's equity
• C. Net worth equals assets
• D. Net worth equals expenses

Answer: (B)

Net worth represents the owner’s claim on the business after all debts are paid, which is exactly what owner’s equity is. In double-entry accounting, assets equal liabilities plus owner’s equity, so rearranging gives owner’s equity (the net worth) = assets minus liabilities. That means net worth is the residual interest the owner has in the business, not a type of revenue or expense, and not simply assets. Revenue and expenses affect this equity over time: revenue increases net income, which raises owner’s equity and thus net worth, while expenses reduce net income and lower owner’s equity. But the static relationship described here is that net worth is interchangeable with owner’s equity. For a quick example, if a business has assets of $600,000 and liabilities of $350,000, the owner’s equity (net worth) is $250,000.

Net worth represents the owner’s claim on the business after all debts are paid, which is exactly what owner’s equity is. In double-entry accounting, assets equal liabilities plus owner’s equity, so rearranging gives owner’s equity (the net worth) = assets minus liabilities. That means net worth is the residual interest the owner has in the business, not a type of revenue or expense, and not simply assets.

Revenue and expenses affect this equity over time: revenue increases net income, which raises owner’s equity and thus net worth, while expenses reduce net income and lower owner’s equity. But the static relationship described here is that net worth is interchangeable with owner’s equity.

For a quick example, if a business has assets of $600,000 and liabilities of $350,000, the owner’s equity (net worth) is $250,000.