Which of the following accounts directly impacts the equity of a business according to the fundamental accounting equation?

• A. Inventory
• B. Owner's Capital
• C. Prepaid Expenses
• D. Accounts Payable

Answer: (B)

Verified step by step guidance

1. Understand the fundamental accounting equation: Assets = Liabilities + Equity. Equity represents the owner's residual interest in the business after liabilities are subtracted from assets.
2. Identify the nature of each account listed in the problem: Inventory and Prepaid Expenses are asset accounts, Accounts Payable is a liability account, and Owner's Capital is an equity account.
3. Recognize that asset accounts (Inventory and Prepaid Expenses) and liability accounts (Accounts Payable) do not directly impact equity. They are components of the equation but do not represent equity itself.
4. Understand that Owner's Capital is part of equity. It directly impacts the equity of the business because it represents the owner's investment in the business.
5. Conclude that among the accounts listed, Owner's Capital is the account that directly impacts the equity of a business according to the fundamental accounting equation.