In accounting terms, which statement best describes the relationship between net worth and owner's equity?

In accounting terms, which statement best describes the relationship between net worth and owner's equity?

• A. Net worth equals revenue
• B. Net worth equals owner's equity
• C. Net worth equals assets
• D. Net worth equals expenses

Answer: (B)

Net worth is the owner’s claim on the business after debts are paid. In accounting, that claim is the same as owner's equity, because owner’s equity equals assets minus liabilities. This comes from the basic equation Assets = Liabilities + Owner's Equity; rearranging gives Owner's Equity = Assets − Liabilities, which is exactly net worth. So the correct idea is that net worth equals owner's equity. It isn’t revenue (income), assets (resources owned), or expenses (costs recorded against income), which describe different aspects of the business. For example, if assets total $500,000 and liabilities total $300,000, net worth and owner's equity are $200,000.