Which statement best describes owner's equity in a sole proprietorship?

• A. It represents the owner's claims on the business after liabilities.
• B. It is equal to total revenues minus expenses.
• C. It equals the owner's salary paid.
• D. It is a separate legal entity from the owner.

Answer: (A)

Owner's equity is the owner's claim on the business after all debts are paid. In a sole proprietorship, it represents assets minus liabilities—the resources the owner effectively owns after the company owes its creditors. This equity grows with the owner’s investments and with profits kept in the business, and it decreases with withdrawals or losses.

Net income (revenues minus expenses) affects equity, but it is not the equity itself. The owner’s salary is an expense that reduces equity, not the amount of equity. Also, in a sole proprietorship the owner and the business aren’t a separate legal entity, so describing ownership as a separate entity isn’t accurate.