Which item is a component of shareholders' equity?

Which item is a component of shareholders' equity?

• A. Retained earnings
• B. Accounts payable
• C. Accrued expenses
• D. Short-term debt

Answer: (A)

Shareholders' equity represents the owners' claim after all liabilities are accounted for. Retained earnings are accumulated profits kept in the business and, therefore, form part of equity, increasing it when profits rise (and decreasing it when dividends are paid). The other items are obligations to outside parties—accounts payable and accrued expenses are current liabilities, and short-term debt is also a liability. Thus, retained earnings is the component that belongs to shareholders' equity.

Shareholders' equity represents the owners' claim after all liabilities are accounted for. Retained earnings are accumulated profits kept in the business and, therefore, form part of equity, increasing it when profits rise (and decreasing it when dividends are paid). The other items are obligations to outside parties—accounts payable and accrued expenses are current liabilities, and short-term debt is also a liability. Thus, retained earnings is the component that belongs to shareholders' equity.