Given the following financial information:\begin{align*}\text{Assets} &= \$120,000 \\\text{Liabilities} &= \$45,000\end{align*}What is the amount of owner's equity that should be reported on the balance sheet?

• A. \$120,000
• B. \$165,000
• C. \$45,000
• D. \$75,000

Answer: (D)

Verified step by step guidance

1. Step 1: Recall the accounting equation, which states: \( \text{Assets} = \text{Liabilities} + \text{Owner's Equity} \). This equation is fundamental to understanding the relationship between these components on the balance sheet.
2. Step 2: Rearrange the accounting equation to solve for Owner's Equity: \( \text{Owner's Equity} = \text{Assets} - \text{Liabilities} \). This formula allows us to calculate the owner's equity when assets and liabilities are known.
3. Step 3: Substitute the given values into the formula. From the problem, \( \text{Assets} = \$120,000 \) and \( \text{Liabilities} = \$45,000 \). The equation becomes: \( \text{Owner's Equity} = \$120,000 - \$45,000 \).
4. Step 4: Perform the subtraction operation to determine the owner's equity. This step involves calculating the difference between the total assets and total liabilities.
5. Step 5: Interpret the result. The calculated owner's equity represents the residual interest in the assets of the entity after deducting liabilities, which is the amount that should be reported on the balance sheet.