Owner Equity Accounts

Owner’s Equity Accounts

Q: What is Owner’s Equity?

·       Owner’s Equity – a residual amount after deducting liabilities from assets. It covers up the capital contribution and withdrawals by the owner; Increase by the capital contribution of the owner and net income of the firm and decreased by the owner’s withdrawals and net losses in the business.

Owner’s equity defined as the “Owner’s Capital” (Sole Proprietorship), Partner’s Capital (Partnership), and Shareholders’ Equity (Corporation). 

Normally credit balances.

 

Q: What is drawing?

·       Drawing – refers to the temporary account used to record initially the amount taken by the owner from the firm. This is closed to the capital account of the owner at the end of the accounting period.

Nominal Accounts

Nominal Accounts refers to the elements of the Income Statement -  the revenue and expense accounts. These accounts are called temporary because they are closed or put to zero balance at the end.

Revenue Accounts

Revenue represents the earnings of the firm from sales of goods and rendering services. Normally revenue is credit balances.

Some common revenue accounts:

·       Sales – summation of sale of goods of a trade or the merchandise.

Cash sales

Sales on account

·       Service Income – refers to the earnings from the service rendered by the servicing firm to its customers.

Cash

Account Services

·       Professional fees – refers to the earnings from the service rendered by the professional servicing firm to its clients which could be cash or in collectibles.

·       Interest Income – refers to the earnings about the time value of money derived from the promissory notes received by the firm, whether in cash or collectible in the future.

·       Rent Income – refers to the income earned from allowing others to use the property or facility of the firm.

·       Gain on Sale of Other Sales - refers to the income from the sales of assets used in the firm operation. There I gain on sale if the proceeds exceed the book value or cost of the disposed asset.

Example: Gain on sale of equipment, Gain on sale of investment, Gain on sale of land, etc.

Application of Basic Accounting Elements

·       Assets

·       Liabilities

·       Owner’s Equity (or capital)

·       Revenues

·       Expenses