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Accounting for a Service Business - Unit 1.6

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1 Accounting for a Service Business - Unit 1.6
Owner’s Equity

2 Owner’s Equity Debit Credit Expenses Increase Decrease Revenue Debit
Expenses are recorded as debits because expenses decrease equity Revenue is recorded as a credit because revenue increases equity Revenue Debit Credit

3 Introducing the Owner’s Drawings Account
The drawings account records the withdrawal of assets from the business by the owner The owner of a business may make a regular practice of withdrawing money or other assets for personal use This withdrawal of assets decreases the value of the owner’s equity (this event is similar to an expense transaction since owner’s equity is reduced) However, expenses are recognized only if the cost was incurred to produce revenue. So withdrawal of assets by the owner is not an expense so…………. A withdrawal of assets is recorded in an account called DRAWINGS – an equity account

4 Drawings Account Has a debit balance since withdrawals decrease owner’s equity The owners drawings account is debited whenever assets are withdrawn by the owner for personal use: Withdrawing cash Removing merchandise for personal use Taking equipment from the business for personal use and Using company funds for personal expenses of the owner or the owner’s family Owners salary – income tax rules state that the business may not record the payment in an expense such as salaries expense. The payment of wages or salaries to an owner must be recorded in the Drawings account.

5 The General Ledger - Review
There is one account for each asset, liability and for the owner’s equity. There is an account for each type of revenue, expense and for Drawings As transactions occur, the changes caused by them are recorded in these accounts Then a trial balance is prepared……

6 Equity Accounts on the Balance Sheet
The income statement is prepared first because the result, the net income or net loss affects the balance sheet…. The owners capital account and drawings account appear in the owner’s equity section of the balance sheet The capital account increases if there is net income earned or if the owner increases the assets of the business by further investment The capital account decreases if there is a net loss or if the owner withdraws assets from the business for personal use The owner’s drawings account is used to record all withdrawals The result of increases or decreases in the capital account are shown in the equity section of the balance sheet

7 Account Form vs. Report Form Balance Sheets
The account form balance sheet lists the assets on the left side and the liabilities and owners equity on the right side The report form balance sheet lists the assets, liabilities and owner’s equity VERTICALLY For the report form balance sheet, dollar signs should be placed as follows: Beside the first figure in each column in both sections of the statement Beside the final total in both sections of the statement The balance sheet equation still applies A = L + OE

8 Preparing Financial Statements From the Trial Balance
Income Statement Statement of Owner’s Equity Balance Sheet

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