A firm's owners' equity at the start of the year is $700,000. During the year, the firm earned $500,000 in revenue and incurred $400,000 in expenses, what would be the balance in equity at the end of the year.
$700,000 + $500,000 - $400,000 = ?
To determine the balance in equity at the end of the year, we need to consider the changes that occurred during the year.
Owners' equity is affected by two main factors: revenue and expenses.
Revenue increases owners' equity, while expenses decrease owners' equity. The difference between revenue and expenses is known as the net income.
First, let's calculate the net income:
Net Income = Revenue - Expenses
Net Income = $500,000 - $400,000
Net Income = $100,000
To determine the balance in equity at the end of the year, we need to add the net income to the beginning equity.
Balance in Equity = Beginning Equity + Net Income
Balance in Equity = $700,000 + $100,000
Balance in Equity = $800,000
Therefore, the balance in equity at the end of the year would be $800,000.