Contractor License Practice Exam

In accounting, what is the term used for the difference between Total Assets and Total Liabilities?

1. Net Income

2. Net Working Capital

3. Equity

4. Cash Flow

The correct answer is: Equity

The term that describes the difference between Total Assets and Total Liabilities is equity. In accounting, equity represents the ownership interest in a company, reflecting the value that shareholders would receive after all liabilities have been settled. It essentially measures what is left for the owners once the company’s obligations are satisfied. Understanding this concept is crucial, as equity is a fundamental element of the accounting equation, which is Assets = Liabilities + Equity. This relationship highlights how the assets of a business are financed, whether through debt (liabilities) or through the owners’ investment (equity). Other related terms, like net income, refer to the company’s profit after expenses have been deducted from revenues and are not directly related to the balance sheet measurement of assets and liabilities. Net working capital focuses on the short-term financial health of a company, calculated as current assets minus current liabilities. Cash flow represents the inflow and outflow of cash within the business over a specific period and doesn't denote the overall balance between assets and liabilities. All these terms serve different purposes in accounting, making equity the appropriate choice for this question.