In a sole proprietorship, owner’s equity represents:

In a sole proprietorship, owner’s equity represents:

• A. The total liabilities of the business
• B. The owner's claim on the assets after subtracting liabilities
• C. The initial capital invested only, regardless of profits
• D. The gross income of the business

Answer: (B)

Owner's equity in a sole proprietorship is the owner's claim on the business assets after subtracting liabilities. Put simply, it equals assets minus liabilities and represents what would remain for the owner if the business settled all its debts. This equity grows with profits kept in the business and shrinks with losses or owner withdrawals, and includes both the original capital invested and any earnings retained. It’s not the total liabilities, not just the initial capital, and not gross income, which measures revenue rather than the owner’s residual claim on assets.

Owner's equity in a sole proprietorship is the owner's claim on the business assets after subtracting liabilities. Put simply, it equals assets minus liabilities and represents what would remain for the owner if the business settled all its debts. This equity grows with profits kept in the business and shrinks with losses or owner withdrawals, and includes both the original capital invested and any earnings retained. It’s not the total liabilities, not just the initial capital, and not gross income, which measures revenue rather than the owner’s residual claim on assets.