Investments by Owner. Investments by owner are the assets the owner puts
into the business.These investments increase owner’s equity.They are recorded in
a category called owner’s capital.
Revenues. Revenues are the gross increase in owner’s equity resulting from
business activities entered into for the purpose of earning income. Generally, revenues
result from selling merchandise, performing services, renting property, and
lending money. Common sources of revenue are sales, fees, services, commissions,
interest, dividends, royalties, and rent.
Revenues usually result in an increase in an asset.They may arise from different
sources and are called various names depending on the nature of the business.
Campus Pizza, for instance, has two categories of sales revenues—pizza sales and
beverage sales.
DECREASES IN OWNER’S EQUITY
In a proprietorship, owner’s drawings and expenses decrease owner’s equity.
Drawings. An owner may withdraw cash or other assets for personal use.We use
a separate classification called drawings to determine the total withdrawals for
each accounting period. Drawings decrease owner’s equity.
Expenses. Expenses are the cost of assets consumed or services used in the
process of earning revenue. They are decreases in owner’s equity that result from
operating the business. For example, Campus Pizza recognizes the following
expenses: cost of ingredients (meat, flour, cheese, tomato paste, mushrooms, etc.);
cost of beverages; wages expense; utility expense (electric, gas, and water expense);
telephone expense; delivery expense (gasoline, repairs, licenses, etc.); supplies expense
(napkins, detergents, aprons, etc.); rent expense; interest expense; and property
tax expense.
In summary, owner’s equity is increased by an owner’s investments and by revenues
from business operations. Owner’s equity is decreased by an owner’s withdrawals
of assets and by expenses. Illustration 1-6 expands the basic accounting
equation by showing the accounts that comprise owner’s equity. This format is
referred to as the expanded accounting equation.
The Basic Accounting Equation 13
H E L P F U L H I N T
In some places we use
the term ”owner’s
equity” and in others
we use ”owners’ equity.”
Owner’s (singular,
possessive) refers to
one owner (the case
with a sole proprietorship).
Owners’ (plural,
possessive) refers to
multiple owners (the
case with partnerships
or corporations).
Illustration 1-6
Expanded accounting
equation
Basic Equation: Assets Liabilities Owner’s Equity
Expanded Assets Liabilities Owner’s Capital Owner’s Drawings
Equation: Revenues Expenses
into the business.These investments increase owner’s equity.They are recorded in
a category called owner’s capital.
Revenues. Revenues are the gross increase in owner’s equity resulting from
business activities entered into for the purpose of earning income. Generally, revenues
result from selling merchandise, performing services, renting property, and
lending money. Common sources of revenue are sales, fees, services, commissions,
interest, dividends, royalties, and rent.
Revenues usually result in an increase in an asset.They may arise from different
sources and are called various names depending on the nature of the business.
Campus Pizza, for instance, has two categories of sales revenues—pizza sales and
beverage sales.
DECREASES IN OWNER’S EQUITY
In a proprietorship, owner’s drawings and expenses decrease owner’s equity.
Drawings. An owner may withdraw cash or other assets for personal use.We use
a separate classification called drawings to determine the total withdrawals for
each accounting period. Drawings decrease owner’s equity.
Expenses. Expenses are the cost of assets consumed or services used in the
process of earning revenue. They are decreases in owner’s equity that result from
operating the business. For example, Campus Pizza recognizes the following
expenses: cost of ingredients (meat, flour, cheese, tomato paste, mushrooms, etc.);
cost of beverages; wages expense; utility expense (electric, gas, and water expense);
telephone expense; delivery expense (gasoline, repairs, licenses, etc.); supplies expense
(napkins, detergents, aprons, etc.); rent expense; interest expense; and property
tax expense.
In summary, owner’s equity is increased by an owner’s investments and by revenues
from business operations. Owner’s equity is decreased by an owner’s withdrawals
of assets and by expenses. Illustration 1-6 expands the basic accounting
equation by showing the accounts that comprise owner’s equity. This format is
referred to as the expanded accounting equation.
The Basic Accounting Equation 13
H E L P F U L H I N T
In some places we use
the term ”owner’s
equity” and in others
we use ”owners’ equity.”
Owner’s (singular,
possessive) refers to
one owner (the case
with a sole proprietorship).
Owners’ (plural,
possessive) refers to
multiple owners (the
case with partnerships
or corporations).
Illustration 1-6
Expanded accounting
equation
Basic Equation: Assets Liabilities Owner’s Equity
Expanded Assets Liabilities Owner’s Capital Owner’s Drawings
Equation: Revenues Expenses
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