Multiple Choice
Which of the following formulas correctly represents the expanded accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Which of the following correctly represents the profit equation in terms of the fundamental accounting equation?
A
Profit = Revenues - Expenses
B
Profit = Assets + Liabilities
C
Profit = Assets - Liabilities
D
Profit = Owner's Equity - Assets
Verified step by step guidance1
Understand the fundamental accounting equation: Assets = Liabilities + Owner's Equity. This equation forms the basis of financial accounting.
Recognize that profit is derived from the income statement, which is separate from the balance sheet. Profit is calculated as Revenues - Expenses.
Analyze the options provided. The correct representation of profit must align with the income statement formula, not the balance sheet equation.
Eliminate options that incorrectly mix balance sheet components (Assets, Liabilities, Owner's Equity) with the concept of profit. For example, 'Profit = Assets + Liabilities' and 'Profit = Assets - Liabilities' are incorrect because they do not relate to revenues and expenses.
Select the correct answer: 'Profit = Revenues - Expenses,' as this directly represents the calculation of profit based on the income statement.
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