On a personal balance sheet, which statement about the relationship between total assets and total liabilities is true?

On a personal balance sheet, which statement about the relationship between total assets and total liabilities is true?

• A. Total assets are greater than total liabilities.
• B. Total assets equal total liabilities.
• C. Total liabilities are greater than total assets.
• D. There is no relationship.

Answer: (A)

The main idea is the relationship between what you own and what you owe on a personal balance sheet. Assets minus liabilities equals net worth, so there’s a direct link: the assets you list should generally exceed what you owe, leaving positive net worth. Because assets = liabilities + net worth, a typical personal balance sheet shows assets greater than liabilities when net worth is positive. That’s why the statement that total assets are greater than total liabilities is true—it reflects positive net worth. If assets and liabilities were the same, net worth would be zero. If liabilities were larger, net worth would be negative. There is a fundamental relationship between the two; saying there’s no relationship would ignore the basic accounting equation.

The main idea is the relationship between what you own and what you owe on a personal balance sheet. Assets minus liabilities equals net worth, so there’s a direct link: the assets you list should generally exceed what you owe, leaving positive net worth.

Because assets = liabilities + net worth, a typical personal balance sheet shows assets greater than liabilities when net worth is positive. That’s why the statement that total assets are greater than total liabilities is true—it reflects positive net worth. If assets and liabilities were the same, net worth would be zero. If liabilities were larger, net worth would be negative. There is a fundamental relationship between the two; saying there’s no relationship would ignore the basic accounting equation.