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The accounting rule states that both sides of the account must balance. Hence if assets are greater than liabilities, they are recorded on the right hand side as:
- a)Bad Loans
- b)Reserves
- c)Profits
- d)Net worth
Correct answer is option 'D'. Can you explain this answer?
Most Upvoted Answer
The accounting rule states that both sides of the account must balanc...
- Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it. Liabilities = Deposits The accounting rule states that both sides of the account must balance.
- Hence if assets are greater than liabilities, they are recorded on the right hand side as Net Worth. Net Worth = Assets – Liabilities
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The accounting rule states that both sides of the account must balanc...
Understanding the Accounting Equation
In accounting, the fundamental equation states that Assets = Liabilities + Equity. This relationship ensures that a company's financial statements are balanced.
When Assets Exceed Liabilities
If assets are greater than liabilities, it indicates that the company has a surplus. This surplus is reflected in the equity section of the balance sheet.
Why Net Worth is Recorded on the Right Side
- Definition of Net Worth: Net worth represents the residual interest in the assets of the entity after deducting liabilities. In simpler terms, it is what the owners truly "own" after fulfilling all obligations.
- Balancing Principle: Since accounting requires that both sides of the equation balance, any surplus (assets exceeding liabilities) is recorded as net worth or equity.
- Classification in Financial Statements: Net worth is typically represented under shareholders' equity in the balance sheet, signifying the value attributable to shareholders.
Options Analysis
- a) Bad Loans: These are not an asset; they represent losses, reducing net worth.
- b) Reserves: While reserves are part of equity, net worth is a broader term encompassing all equity components.
- c) Profits: Profits contribute to net worth but are temporary; they affect retained earnings, not directly recorded as net worth.
- d) Net Worth: This accurately captures the essence of the surplus when assets exceed liabilities, making it the correct choice.
Conclusion
In summary, when assets exceed liabilities, the resulting surplus is accurately represented as "net worth" on the right side of the balance sheet, confirming the integrity of the accounting equation.
In accounting, the fundamental equation states that Assets = Liabilities + Equity. This relationship ensures that a company's financial statements are balanced.
When Assets Exceed Liabilities
If assets are greater than liabilities, it indicates that the company has a surplus. This surplus is reflected in the equity section of the balance sheet.
Why Net Worth is Recorded on the Right Side
- Definition of Net Worth: Net worth represents the residual interest in the assets of the entity after deducting liabilities. In simpler terms, it is what the owners truly "own" after fulfilling all obligations.
- Balancing Principle: Since accounting requires that both sides of the equation balance, any surplus (assets exceeding liabilities) is recorded as net worth or equity.
- Classification in Financial Statements: Net worth is typically represented under shareholders' equity in the balance sheet, signifying the value attributable to shareholders.
Options Analysis
- a) Bad Loans: These are not an asset; they represent losses, reducing net worth.
- b) Reserves: While reserves are part of equity, net worth is a broader term encompassing all equity components.
- c) Profits: Profits contribute to net worth but are temporary; they affect retained earnings, not directly recorded as net worth.
- d) Net Worth: This accurately captures the essence of the surplus when assets exceed liabilities, making it the correct choice.
Conclusion
In summary, when assets exceed liabilities, the resulting surplus is accurately represented as "net worth" on the right side of the balance sheet, confirming the integrity of the accounting equation.
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