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Total equity of a corporation is made up of the balances in which two accounts?
AShare Capital and Retained Earnings
BCash and Retained Earnings
CShare Capital and Accounts Payable
DRetained Earnings and Cash Dividends
Answer & Solution
Correct answer: A. Share Capital and Retained Earnings
1. Equity is the owners' claim on the assets of the business.
2. Only two accounts fall in this category: Share Capital (common stock) and Retained Earnings.
3. Share capital comes from outside investment; retained earnings is profit generated inside the business.
4. Cash and Accounts Payable are not equity accounts, ruling out A and C; Cash Dividends is a contra account, ruling out D.
5. Therefore equity is Share Capital plus Retained Earnings.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.5.3 "Stockholders' Equity", p.37_
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