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Which of the following transactions affects owner's equity?
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1. Introduction to Accounting
Fundamental Accounting Equation
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The balance sheet is set up to reflect the fundamental accounting equation. This equation shows:
A
Assets = Liabilities + Owner's Equity
B
Assets = Revenues - Expenses
C
Liabilities = Assets + Owner's Equity
D
Owner's Equity = Assets - Revenues
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Understand the fundamental accounting equation, which is the foundation of the balance sheet. It states that Assets = Liabilities + Owner's Equity. This equation ensures that the balance sheet remains balanced.
Analyze the options provided in the problem. The correct equation must align with the fundamental accounting principle that assets are financed either through liabilities (debts) or owner's equity (investments).
Option 1: 'Assets = Liabilities + Owner's Equity' is correct because it reflects the fundamental accounting equation and the structure of the balance sheet.
Option 2: 'Assets = Revenues - Expenses' is incorrect because revenues and expenses are components of the income statement, not the balance sheet.
Option 3: 'Liabilities = Assets + Owner's Equity' and Option 4: 'Owner's Equity = Assets - Revenues' are incorrect because they do not align with the fundamental accounting equation. Carefully compare each option to the correct equation to confirm the answer.
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