Chapter 6
The Accounting Cycle: Statements and Closing Entries
138
The statement begins with the
opening balance of the owner’s
capital account. In our example,
the opening balance was $5,300
on January 1, 2016.
Owner’s equity will increase if
the owner invests more cash or
assets into the business, or if the
business earned a profit during the period. In our example, the owner invested $5,000 into the
business during the month. Notice the net income (marked 1) from the income statement in
Figure 6.4 is also added.
The equity will decrease if the owner withdraws any capital (cash or assets) from the business for
personal use, or if the business suffered a loss during the period.There was no loss in our example,
but there was a $2,000 withdrawal, as shown in the worksheet under Parish, Drawings.
The final closing balance of the capital account (marked 2) is transferred to the owner’s equity
section of the balance sheet in Figure 6.6.
The Balance Sheet
The balance sheet is prepared using the values from the asset and liability accounts from the
adjusted trial balance. Previous chapters showed the balance sheet organized horizontally, with
assets beside liabilities and owner’s equity. An alternate organization, and the way balance sheets
are most commonly presented, is vertically. Assets are listed above liabilities and owner’s equity.
MP Consulting
Balance Sheet
As at January 31, 2016
Assets
Cash
$3,800
Accounts Receivable
4,000
Prepaid Insurance
1,100
Equipment
$8,300
Accumulated Depreciation
(150)
8,150
Total Assets
$17,050
Liabilities
Accounts Payable
$1,250
Interest Payable
25
Unearned Revenue
1,800
Bank Loan
2,500
Total Liabilities
$5,575
Owner’s Equity
Parish, Capital
11,475
Total Liabilities and Owner's Equity
$17,050
________________
Figure 6.6
The ending balance of owner’s equity for a given period
can be calculated as follows:
Ending Owner’s Equity = Beginning Owner’s Equity
+ Owner’s Contributions
+ Net Income (Loss)
− Owner’s Withdrawals
WORTH REPEATING
2
