owner’s equity represents the claims by the owner of a business to the assets of the business. Theoretically, owner’s equity is what would be left if all liabilities were paid, and it is sometimes said to equal net assets. By rearranging the accounting equation, we can define owner’s equity this way:
Owner’s Equity = Assets – Liabilities.
Owner’s equity is affected by the owner’s investments in and withdrawals from the business and by the business’s revenues and expenses. ■■ owner’s investments are assets that the owner puts into the business (e.g., by transferring cash from a personal bank account to the business’s bank account). In this case, the assets (cash) of the business increase, and the owner’s equity in those assets also increases.
Withdrawals are assets that the owner takes out of the business (e.g., by transferring cash from the business’s bank account to a personal bank account). In this case, the assets of the business decrease, as does the owner’s equity in the business. Simply stated, revenues and expenses are the increases and decreases in owner’s equity that result from operating a business.
▲ For example, the amounts customers pay (or agree to pay in the future) to KeepFit Center for its exercise service are revenues for Keep-Fit. Keep-Fit’s assets (cash or accounts receivable) increase, as does its owner’s equity in those assets.
▼ On the other hand, the amount Keep-Fit must pay out (or agree to pay out) for rent and wages to instructors so that it can provide its service are expenses. In this case, the assets (cash) decrease or the liabilities (accounts payable) increase, and the owner’s equity decreases. Generally, a company is successful if its revenues exceed its expenses.
▲ When revenues exceed expenses, the difference is called net income. ▼ When expenses exceed revenues, the difference is called net loss. In summary, owner’s equity is the accumulated net income (revenues 2 expenses) minus withdrawals over the life of the business.
In summary, owner’s equity is the accumulated net income (revenues 2 expenses) minus withdrawals over the life of the busines