ACCA Financial Reporting (F7) Practice Exam 2025 – Complete Prep Guide

The concept of equity in accounting refers to the ownership interest in a company's assets after deducting liabilities. The primary components of equity typically include share capital, retained earnings, and other reserves, which reflect the company's income retained for growth or future investment, as well as any surplus not distributed to shareholders.

Investment income, on the other hand, represents returns generated from investments made by the company, such as interest, dividends, or other forms of profit. While investment income impacts the overall profitability of a business and can eventually be included in retained earnings if it is simply added to the income statement, it is not itself a direct component of equity. Therefore, it does not meet the definition or classification of equity components.

This understanding reinforces why investment income is the correct answer, as it does not belong in the categorization of equity components on a balance sheet, while the other options are elements that form part of equity in a business.