Which statement about equity is most correct?

• A. Equity is the residual claim against assets after all liabilities have been paid off.
• B. Equity equals total assets minus current liabilities only.
• C. Equity is the same as cash on hand.
• D. Equity is the source of revenue only.

Answer: (A)

Equity represents the owners’ claim on the assets that remains after all debts have been paid. In financial reporting, assets equal liabilities plus equity, so equity is what’s left for the owners once obligations are settled. The statement that best captures this is that equity is the residual claim against assets after all liabilities have been paid off.

Why this fits: it reflects the fundamental accounting equation and the idea that equity is the owners’ stake in the company after liabilities are satisfied.

Why the other ideas aren’t right: equity is not simply assets minus current liabilities (that would ignore other liabilities); cash on hand is just an asset, not equity; and equity isn’t a source of revenue itself (revenue can affect equity indirectly through net income and retained earnings, but it’s not equity in itself).