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.
Be sure to check your understanding of this lesson by taking the quiz in the Test Yourself! section further below. And right at the bottom of the page, you can find more questions on the topic submitted by fellow students.
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.
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:
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 (money) of $15,000.
So the first account that is affected is bank (or cash).
An Example of Capital
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.
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.
Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.
Difficulty Rating: Beginner
Quiz length: 2 questions
Time limit: 4 minutes
Important:The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.
Well, that's it!
I hope this owners equity example has given you a better understanding of what happens when the owner invests capital.