To find the correct equation that balances the Owner's Equity in a sole proprietorship, we need to understand the components that affect it. Owner's Equity can be thought of as the owner's residual interest in the assets of the business after deducting liabilities. The main elements that affect Owner's Equity are Owner's Capital, Owner's Withdrawals, Revenue, and Expenses.
The basic components in the formula for Owner's Equity are as follows:
1. Owner's Capital: This is the initial investment or the amount of money the owner has put into the business.
2. Owner's Withdrawals: This represents the money the owner takes out of the business for personal use.
3. Revenue: This is the income earned from business activities such as sales of goods or services.
4. Expenses: These are the costs incurred in the process of earning the revenue, such as rent, salaries, utilities, etc.
Owner's Equity can be calculated using the formula:
[tex]\[ (\text{Owner's Capital} - \text{Owner's Withdrawals}) + (\text{Net Income}) = \text{Owner's Equity} \][/tex]
Net Income is calculated as:
[tex]\[ \text{Net Income} = \text{Revenue} - \text{Expenses} \][/tex]
Substituting this into our equation for Owner's Equity gives us:
[tex]\[ (\text{Owner's Capital} - \text{Owner's Withdrawals}) + (\text{Revenue} - \text{Expenses}) = \text{Owner's Equity} \][/tex]
From the choices given:
A. Expenses - Revenue
B. Revenue - Expenses
C. Revenue + Expenses
D. Revenue [tex]\(\times\)[/tex] Expenses
We can see that option B fits perfectly since it specifies [tex]\(\text{Revenue} - \text{Expenses}\)[/tex], which matches our derived component for Net Income that affects Owner's Equity.
Thus, the correct choice is:
B. Revenue - Expenses
