Question

Jeremy, a senior accountant, is preparing the income statement for the manufacturing business for which he works. After considering all revenues and expenses, Jeremy has concluded that his employer (firm) has made a net profit of $20,000. What effect will this amount have on the balance sheet that Jeremy is about to prepare next?
A. The amount will be added to the business’ long-term liabilities.
B. The amount will be subtracted from the business’ fixed assets.
C. The amount will be added to the business owners’ equity.
D. The amount will be deducted from the business owners’ equity.
E. The amount will be added to the fixed assets.

Answer 1

Answer

C. The amount will be added to the owners’ equity.

Explanation

The profit belongs to the business owner or to the stockholders of a corporation. The business person’s equity is indicated on the credit side of the balance sheet. I.e. Assets= Liabilities +Owner’s Equity. The liabilities of the business will remain the same where as the owner’s equity in the business will increase. The ultimate impact of profit is that the business assets and business person’s equity will increase.