Multiple Choice
Which of the following is a criterion for outlays that may be capitalized as part of a capital asset under the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Which of the following statements is NOT true about owners' equity in the context of the fundamental accounting equation?
A
Owners' equity is calculated as Assets minus Liabilities.
B
Owners' equity can be affected by both revenues and expenses.
C
Owners' equity decreases when the owner invests additional capital.
D
Owners' equity increases when the business earns a profit.
Verified step by step guidance1
Understand the fundamental accounting equation: Assets = Liabilities + Owners' Equity. Rearranging this equation, Owners' Equity = Assets - Liabilities.
Recognize that Owners' Equity is influenced by revenues, expenses, and owner transactions. Specifically, revenues increase Owners' Equity, while expenses decrease it.
Consider the impact of owner investments. When the owner invests additional capital into the business, it increases Owners' Equity, not decreases it.
Evaluate the given statements in the problem. The statement 'Owners' equity decreases when the owner invests additional capital' contradicts the fundamental principles of accounting.
Conclude that the statement 'Owners' equity decreases when the owner invests additional capital' is NOT true about Owners' Equity.
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