Accounting for a Service
Business - Unit 1.6
Owner’s Equity
Owner’s Equity
Debit
Decrease
Expenses
Debit
Increase
Credit
Increase
Revenue
Credit
Expenses are recorded as debits
because expenses decrease equity
Debit
Credit
Increase
Revenue is recorded as a credit
because revenue increases equity
Introducing the Owner’s Drawings
Account
 The drawings account records the withdrawal of assets
from the business by the owner
 The owner of a business may make a regular practice of
withdrawing money or other assets for personal use
 This withdrawal of assets decreases the value of the
owner’s equity (this event is similar to an expense
transaction since owner’s equity is reduced)
 However, expenses are recognized only if the cost was
incurred to produce revenue. So withdrawal of assets by
the owner is not an expense so………….
 A withdrawal of assets is recorded in an account called
DRAWINGS – an equity account
Drawings Account
 Has a debit balance since withdrawals decrease owner’s
equity
 The owners drawings account is debited whenever assets
are withdrawn by the owner for personal use:
Withdrawing cash
Removing merchandise for personal use
Taking equipment from the business for personal use
and
Using company funds for personal expenses of the
owner or the owner’s family
Owners salary – income tax rules state that the business
may not record the payment in an expense such as
salaries expense. The payment of wages or salaries to
an owner must be recorded in the Drawings account.
The General Ledger - Review
 There is one account for each asset, liability and
for the owner’s equity.
 There is an account for each type of revenue,
expense and for Drawings
 As transactions occur, the changes caused by
them are recorded in these accounts
 Then a trial balance is prepared……
Equity Accounts on the Balance
Sheet
 The income statement is prepared first because
the result, the net income or net loss affects the
balance sheet….
 The owners capital account and drawings account
appear in the owner’s equity section of the
balance sheet
 The capital account increases if there is net income earned or if the
owner increases the assets of the business by further investment
 The capital account decreases if there is a net loss or if the owner
withdraws assets from the business for personal use
 The owner’s drawings account is used to record all withdrawals
 The result of increases or decreases in the capital account are
shown in the equity section of the balance sheet
Account Form vs. Report Form
Balance Sheets
 The account form balance sheet lists the assets on the
left side and the liabilities and owners equity on the right
side
 The report form balance sheet lists the assets, liabilities
and owner’s equity VERTICALLY
 For the report form balance sheet, dollar signs should be
placed as follows:
 Beside the first figure in each column in both sections of the
statement
 Beside the final total in both sections of the statement
 The balance sheet equation still applies
A = L + OE
Preparing Financial Statements
From the Trial Balance
Income Statement
Statement of Owner’s Equity
Balance Sheet