Which part of Suarez Farms' financial statements represents the capital invested in the business according to the fundamental accounting equation?

• A. Total Assets
• B. Owner's Equity
• C. Total Liabilities
• D. Net Income

Answer: (B)

Verified step by step guidance

1. Understand the fundamental accounting equation: Assets = Liabilities + Owner's Equity. This equation represents the relationship between a company's resources (assets), obligations (liabilities), and the owner's investment (owner's equity).
2. Identify the components of the financial statements provided in the problem: Total Assets, Total Liabilities, Owner's Equity, and Net Income.
3. Recognize that 'Owner's Equity' is the portion of the fundamental accounting equation that represents the capital invested in the business by the owner(s). It is calculated as the residual interest in the assets of the business after deducting liabilities.
4. Clarify that 'Net Income' is not part of the fundamental accounting equation directly but contributes to Owner's Equity through retained earnings. Net Income increases Owner's Equity when profits are retained in the business.
5. Conclude that the correct part of Suarez Farms' financial statements representing the capital invested in the business is 'Owner's Equity,' as it directly reflects the owner's investment according to the fundamental accounting equation.