Florida Contractor Practice Exam

Which of the following is NOT a correct expression of the relationship between owner's equity, total assets, and total liabilities?

1. Assets = Liabilities + Net Worth

2. Net Worth = Assets - Liabilities

3. Owner's Equity + Liabilities = Assets

4. Liabilities - Net Worth = Assets

The correct answer is: Owner's Equity + Liabilities = Assets

The relationship between owner's equity, total assets, and total liabilities is fundamental to understanding financial accounting, particularly in a business or contractor context. The correct option indicates that "Owner's Equity + Liabilities = Assets.” In financial terms, the accounting equation is defined as Assets = Liabilities + Owner's Equity (which can also be referred to as Net Worth). This indicates that all the resources owned by a business (assets) are financed either through borrowing (liabilities) or through the owners' investments. Therefore, this expression correctly illustrates the relationship. The option indicating that "Liabilities - Net Worth = Assets" misrepresents this relationship. When you subtract net worth from liabilities, the operation suggests a completely different relationship that does not hold in standard accounting definitions. Instead, it distorts the understanding of how assets, liabilities, and owner’s equity interact. Thus, highlighting the importance of understanding these relationships helps clarify why the correct answer presented does not accurately express them, while the other options provide legitimate representations of the fundamental accounting equation.