Which of the following statements is the correct definition of owner's equity?

• A. Owner's equity is the sum of all revenues earned by the business during a period.
• B. Owner's equity is the residual interest in the assets of the entity after deducting liabilities.
• C. Owner's equity is the total value of the company's liabilities.
• D. Owner's equity is the total amount of cash held by the business at any given time.

Answer: (B)

Verified step by step guidance

1. Step 1: Begin by understanding the concept of owner's equity. Owner's equity represents the residual interest in the assets of an entity after deducting liabilities. It is essentially what remains for the owners once all debts are paid.
2. Step 2: Analyze the options provided in the problem. The first option states that owner's equity is the sum of all revenues earned during a period. This is incorrect because revenues are part of the income statement and do not directly define owner's equity.
3. Step 3: Evaluate the second option, which states that owner's equity is the residual interest in the assets of the entity after deducting liabilities. This is the correct definition of owner's equity, as it aligns with the accounting equation: Assets = Liabilities + Owner's Equity.
4. Step 4: Review the third option, which claims that owner's equity is the total value of the company's liabilities. This is incorrect because liabilities are obligations owed to creditors, not the owner's interest in the business.
5. Step 5: Assess the fourth option, which states that owner's equity is the total amount of cash held by the business. This is incorrect because cash is just one component of assets, and owner's equity encompasses the net value of all assets after liabilities are deducted.