Future Business Leaders of America (FBLA) Accounting Practice Test

Which component is included in the owner's equity section of the balance sheet?

1. Retained Earnings

2. Accounts Payable

3. Current Liabilities

4. Cash on Hand

The correct answer is: Retained Earnings

Retained earnings are a fundamental component of the owner's equity section of the balance sheet because they represent the cumulative amount of net income that a company has retained, rather than distributed as dividends to shareholders. This figure reflects how much profit has been reinvested in the business over time, contributing to the overall value of the company from the owner's perspective. Owner's equity encompasses all claims by the owners on the assets of the company after liabilities have been settled. Retained earnings will increase as the company generates profits, which can then be utilized for various purposes such as reinvestment in business operations, debt repayment, or future dividend payouts. The other choices represent different financial aspects that do not belong to owner's equity. Accounts payable and current liabilities are obligations that the company owes to creditors, while cash on hand is an asset that the company owns, not a claim by owners against the assets. Therefore, retained earnings distinctly represent the portion of equity that is derived from the company's operational success, making it an essential part of owner's equity.