Welcome to our tutorial on the journal entry for owner's equity, where we're going to go through the previous example with our sample business, George's Catering, and see what the debit and credit entries need to be.
Here is our previous equity example:
a) George decides to start a catering business and invests $15,000 of his personal funds into the bank account of the business.
To work out the double entry we're going to first review how this transaction would affect our basic accounting equation:
Remember, the investment of assets in a business by the owner or owners is called capital.
The owner’s stake in the business (owner’s equity) increases when he invests assets in the business, because it is his assets.
George’s Catering now consists of assets (cash) of $15,000, and the owner owns all $15,000 of these assets.
Assets (money) increase from $0 to $15,000.
On what side do assets increase?
The debit side (left). So, assets are debited.
The owner’s equity (capital) also increases.
On what side does the owner’s equity increase? The credit side (right).
So, the owner’s equity, and specifically the account called "capital," is credited.
The owner's equity journal entry is thus:
Reminder: the entry of a debit and a credit is what is known in accounting as the double-entry system.
Double entry literally means two entries.
The double-entry system means that, for each transaction, two entries are made by the accountant. These two entries enable us to show that the total assets of the business belong to the people you owe money to (liabilities) and to the owner himself (owner’s equity).
The two entries ensure that the two sides of this equation always balance.
The double-entry system, and accounting as a whole, is all based on the equation above.
Did that journal entry make sense? If so, move ahead to our next lesson, where we'll tackle the journal entry for a bank loan.
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