Throughout this example and the ones that follow, we'll be using a business called George's Catering to illustrate each of the basic accounting transactions. We will specifically be looking at how each transaction affects the basic accounting equation.
Alright, so the first type of transaction we're going to be dealing with is the owners equity.
Let's use an example to see how this works.
George Burnham decides to start his own business, George’s Catering.
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?
George’s Catering now consists of assets (bank) of $15,000.
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.
The investment of assets in a business by the owner or owners is called capital. The owner’s stake in the business (the owner’s equity) increases when he invests assets in the business, 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.