During May, the Friendly Resort had income of $10 000 and expenses of $4000. The owner withdrew $800 cash from the business during the month. If Owners' Equity on 31 May was $18 000, Owners' Equity on 1 May must have been:
A) $23 200
B) $12 000
C) $12 800
D) $24 000

Question

Quizplus · Accepted Answer

We need to use the accounting equation to solve this problem:

Assets = Liabilities + Owners' Equity

We know that expenses decrease Owners' Equity and income increases it. Also, the owner's withdrawal (a.k.a. "draw") decreases Owners' Equity. Therefore, we can set up the following equation to find out what Owners' Equity was on May 1:

Owners' Equity on May 1 = Owners' Equity on May 31 - Income + Expenses - Draw

Substituting the values we have:

Owners' Equity on May 1 = $18 000 - $10 000 + $4 000 - $800
Owners' Equity on May 1 = $12 800

Therefore, the answer is C) $12 800.

During May, the Friendly Resort Had Income of $10 000