What is the primary component of owner's equity in a business?

The primary component of owner's equity in a business is indeed the initial investment and accumulated net profits. Owner's equity represents the owner's share in the business after liabilities have been deducted from assets. It reflects the financial interest that the owner has in the business.

The initial investment accounts for the funds that the owner uses to start or invest in the business, while accumulated net profits represent the earnings that have been retained in the business rather than distributed to the owner. Together, these elements show how much wealth the business has generated that belongs to the owner.

In contrast, liabilities and debts are obligations that the business must repay and are not part of the owner's equity. Revenue generated from sales refers to the income a business earns but does not directly represent the owner's equity without considering the associated costs and expenses. Lastly, expenses associated with business operations also do not make up owner’s equity—expenses reduce profits and, subsequently, the retained earnings within owner’s equity. Owner's equity ultimately provides a clear picture of what the owner's investment in the business has grown to over time.