To determine the firm's capital, we need to understand the relationship between assets, liabilities, and capital in accounting. The basic accounting equation is:
Assets = Liabilities + Capital
Where:
-
Assets are what the company owns.
-
Liabilities are what the company owes to others.
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Capital (or equity) is the residual interest in the assets after deducting liabilities.
Step-by-Step Explanation
- Identify the Given Values:
- Assets = #190,500
- Loan (Liability) = #14,000
-
Creditor (Liability) = #8,000
-
Calculate Total Liabilities:
Total liabilities are the sum of all debts the company owes. In this case, we have:
- Loan from Bala = #14,000
- Creditor = #8,000
Therefore, total liabilities can be calculated as:
[
\text{Total Liabilities} = \text{Loan} + \text{Creditor} = 14,000 + 8,000 = 22,000
]
- Apply the Accounting Equation:
Now, we can rearrange the accounting equation to solve for capital:
[
\text{Capital} = \text{Assets} - \text{Liabilities}
]
Plugging in the values we have:
[
\text{Capital} = 190,500 - 22,000
]
-
Perform the Calculation:
[
\text{Capital} = 190,500 - 22,000 = 168,500
]
-
Final Answer:
The firm's capital is #168,500.
Explanation of Options
- Option A: #184,000
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This option is incorrect because it does not accurately reflect the subtraction of total liabilities from total assets.
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Option B: #196,500
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This option is also incorrect. It suggests that the liabilities were not deducted from the assets, leading to an inflated capital figure.
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Option C: #212,000
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This option is incorrect as it implies that the liabilities were added to the assets, which is not how capital is calculated.
-
Option D: #168,500
- This is the correct answer, as it accurately reflects the calculation of capital by deducting total liabilities from total assets.
Common Pitfalls
- Misunderstanding Liabilities: Some students may confuse liabilities with assets, leading to incorrect calculations.
- Forgetting to Sum Liabilities: It’s crucial to ensure that all liabilities are summed before subtracting from assets.
- Incorrect Application of the Accounting Equation: Always remember the fundamental relationship between assets, liabilities, and capital.
Revision Summary
- The accounting equation is Assets = Liabilities + Capital.
- To find capital, use the formula: Capital = Assets - Liabilities.
- Total liabilities must include all debts owed by the firm.
- The correct capital for Superstores is #168,500.