Owners Equity Example


Previous lesson: Basic Accounting Transactions 
Next lesson: Liability Example




Welcome to our first example of a basic accounting transaction - this one dealing with owners equity.

Throughout this owners equity example and the ones that follow, we'll be using a business called George's Catering to illustrate each of the transactions.

Please note: This lesson provides an introduction to an owners equity transaction - showing which accounts are affected and the overall effect on the accounting equation.

For a more in-depth lesson on this transaction, including the debit and credit journal entry, see the advanced lesson on owners equity.

To see the definition of owners equity, click through to our earlier lesson What is Owners Equity?

Alright, so let's look at an example of owners equity.

George Burnham decides to start his own business, George’s Catering.

At this stage the balances of each of the elements of our accounting equation are $0:

Accounting equation for a business starting off

a) What is the first thing George is going to do? He’s going to invest in the business (he’s going to put some assets into the business). George decides to invest $15,000 of his personal funds into the business’s bank account.

What happens to our equation? 

Owner's equity - investment in business

George’s Catering now consists of assets (money) of $15,000.

So the first account that is affected is bank (or cash).


An Example of Capital

capital investment owners equity

Now, a business is started by the owner.

The owner invests his assets in the business so that the business will produce a profit for him.

There is a specific name for the investment of assets in a business by the owner or owners.

The investment of assets in a business by the owner is called capital.


Example of capital - both assets and owners equity increasing

When the owner invests assets in a business, the owner’s stake in the business (the owner’s equity) increases , because it is his assets.

Notice that liabilities (debts to external parties) are unaffected. Their stake in the assets of the business does not change (still $0), because they had nothing to do with this. 

As you can see above, both sides of the equation are affected – one to increase the assets, and one to increase the owner’s equity.

In other words, we are showing that the owner has put in more assets to the business, and these assets belong to him. 




Well, that's it!

I hope this owners equity example has given you a better understanding of what happens when the owner invests capital.

Go ahead and click through to the next lesson - an example of a transaction involving a liability.




Check out the advanced lesson on the Owners Equity Example (including the debit and credit journal entry)

Return from Owners Equity Example to Basic Accounting Transactions 

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Previous lesson: Basic Accounting Transactions 
Next lesson: Liability Example



Questions Relating to This Lesson

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General Journal Entry for
Beginning Operations
 
Q: I am trying to do a general journal entry for the following and was having trouble, could you help me with what accounts to debit and credit in this …


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