How to Calculate Equity at the End of the Period for a Business
What is the equity at the end of the period for HNM Consulting Pty Ltd?
A. $45,000
B. $20,000
C. $40,000
D. $25,000
E. $75,000
Answer
The correct answer is E. $75,000
Calculating equity at the end of the period for a business involves understanding the basic accounting equation: Equity = Assets - Liabilities. Using the data provided for HNM Consulting Pty Ltd, we can see that the total assets at the beginning of the year were $80,000 and total liabilities were $40,000.
Throughout the year, the business earned $150,000 in income, incurred $95,000 in expenses, and paid out dividends of $20,000. To calculate the equity at the end of the period, we need to first determine the net income:
Net Income = Income - Expenses
Net Income = $150,000 - $95,000 = $55,000
Next, we can calculate the equity at the end of the period using the formula:
Equity at the end of the period = (Total assets at the beginning of the year + Net Income) - Total liabilities - Dividends paid
Equity at the end of the period = ($80,000 + $55,000) - $40,000 - $20,000
Equity at the end of the period = $135,000 - $40,000 - $20,000
Equity at the end of the period = $75,000
Therefore, the equity at the end of the period for HNM Consulting Pty Ltd is $75,000. This demonstrates the financial health and value of the business, showing that it has assets exceeding liabilities and has generated profit during the year.