Owners' equity is comprised of which of the following?

Owners' equity is comprised of which of the following?

• A. The owners' initial investment in the business
• B. Retained earnings
• C. Both initial investment and retained earnings
• D. Unclaimed profits

Answer: (C)

Owners' equity represents the owners' claim on the business after liabilities are subtracted from assets. It grows when owners invest capital and when the business earns profits that are kept in the company (retained earnings). The two components that sum to total owners' equity are the initial investment (capital contributed) and retained earnings. For example, if owners put in 50,000 and the business earns 20,000 in profits that are kept in the business, owners' equity would be 70,000. The idea of unclaimed profits doesn’t fit as a separate component—profits not distributed are still captured as retained earnings.

Owners' equity represents the owners' claim on the business after liabilities are subtracted from assets. It grows when owners invest capital and when the business earns profits that are kept in the company (retained earnings). The two components that sum to total owners' equity are the initial investment (capital contributed) and retained earnings. For example, if owners put in 50,000 and the business earns 20,000 in profits that are kept in the business, owners' equity would be 70,000. The idea of unclaimed profits doesn’t fit as a separate component—profits not distributed are still captured as retained earnings.