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A corporation's accounting equation can be expressed as Assets = Liabilities + Equity. Within equity, which two account balances together make up total shareholders' equity in this introductory model?
ARevenue and total expenses
BShare capital and retained earnings
CCash and accounts receivable
DDividends and share premium
Answer & Solution
Correct answer: B. Share capital and retained earnings
1. Total shareholders' equity is built from owner-contributed value plus internally generated value.
2. Owner-contributed value sits in the share capital (common stock) account.
3. Internally generated value (accumulated profit) sits in retained earnings.
4. So total shareholders' equity = share capital + retained earnings.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.1 "Accounting Equation", p.242_
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