Which accounting equation represents the relationship used in a sole trader's statement of financial position?
Correct answer: A. Assets = Capital + Liabilities
- A. Assets = Capital + Liabilities
- B. Assets = Revenue + Expenses
- C. Capital = Assets + Liabilities
- D. Liabilities = Assets + Drawings
Explanation
The accounting equation states that business assets are financed by the owner's capital and liabilities. Drawings and profit affect capital but do not change this basic relationship.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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