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Which statement is true about the relationship between total assets and total liabilities according to the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Net worth is calculated by subtracting liabilities from which of the following?
A
Expenses
B
Assets
C
Revenues
D
Owner's equity
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Step 1: Understand the concept of net worth. Net worth represents the value of an entity's assets after deducting its liabilities. It is a measure of financial health.
Step 2: Recall the formula for net worth: Net Worth = Assets - Liabilities. This formula highlights that net worth is derived by subtracting liabilities from assets.
Step 3: Analyze the options provided in the problem. Expenses, revenues, and owner's equity are not directly used in the calculation of net worth. Assets are the correct component used in the formula.
Step 4: Confirm that liabilities are subtracted from assets to determine net worth. This aligns with the fundamental accounting equation: Assets = Liabilities + Owner's Equity.
Step 5: Conclude that the correct answer is 'Assets,' as net worth is calculated by subtracting liabilities from assets.
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