What does owners equity represent in a business?

Owner's equity represents the residual interest in the assets of a business after deducting liabilities. In simpler terms, it reflects the amount that the owners truly 'own' in the business, which comes from their initial capital input along with any retained earnings over time.

This explanation aligns with the choice of initial investment plus accumulated net profits because the initial investment comprises the owners’ contributions to the business, and accumulated net profits represent the company’s retained earnings that are either reinvested in the business or retained for future use. Together, these two components give a full picture of what the owner's equity actually contains, as it accounts for both the funds initially put in and the profits generated by the business operations over time.

In contrast, the other options do not accurately encompass the full scope of owner's equity. For instance, just the initial investment plus borrowed funds would overlook the accumulated profits that contribute to the overall equity. Similarly, focusing solely on accumulated net profits does not consider the initial capital that was invested. Lastly, while total assets minus liabilities could lead to the calculation of owner's equity, it doesn't explicitly define it in terms of the initial investment combined with profits, which is crucial for understanding the full nature of owner’s equity.