Which item is an example of equity in the given balance sheet?

• A. Common stock
• B. Accounts payable
• C. Retained earnings
• D. Both common stock and retained earnings

Answer: (D)

Equity represents the owners’ claim on the company after all liabilities are settled. It includes funds contributed by shareholders and the profits the company has kept over time. Common stock reflects the capital investors have put into the company and is a core component of equity. Retained earnings are the cumulative profits that the company has not distributed as dividends, also part of equity because they belong to the owners through the company’s reinvestment. Accounts payable is a liability, representing money the company owes to suppliers. So both common stock and retained earnings are in the equity section, making the combined option the correct choice.