Chapter 2
Linking Personal Accounting to Business Accounting
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In business accounting, owner’s equity is a category on the balance sheet but not an account.
Separate accounts are required to record transactions such as owner’s contribution and owner’s
withdrawals.
The
owner’s capital account
is used to record the amount of the owner’s equity including
owner’s contributions. Owner’s contributions are added directly into owner’s capital. The owner
can also withdraw cash from the business to pay for personal items. These withdrawals are called
owner’s drawings
and decrease the business’ assets and the value of owner’s equity. Owner’s draw-
ings are never an expense and will never appear on the income statement. Owner’s drawings,
although a part of equity, does not appear on the balance sheet. Instead it appears on its own state-
ment, which will be introduced later in the chapter.
In the personal T-account worksheet from the previous chapter, we used a single T-account to
track the net worth transactions of an individual. In the context of a business, this single T-account
is now represented by owner’s capital. A separate T-account will be used for owner’s drawings
to track the amount removed from the business for personal use. The two T-accounts in Figure
2.3 below are the generic capital and drawings account. In an actual proprietary business, these
accounts will typically have the owner’s name attached to them. For example, if John Smith was the
owner, the accounts would be called “Smith, Capital” and “Smith, Drawings.”
NETWORTH
OWNER’S CAPITAL
OWNER’S DRAWINGS
+
-
+
-
+
-
Opening
Balance
Opening
Balance
INCREASE
INCREASE
INCREASE
DECREASE
DECREASE
DECREASE
Personal
NETWORTH
Business
OWNER’S EQUITY
______________
FIGURE 2.3
With these new T-accounts that make up owner’s equity, the T-account increase and decrease map
introduced in the previous chapter will be modified slightly to accommodate capital and drawings.
This new T-account map, shown in Figure 2.4, will be the basis we follow for the remainder of this
chapter. Notice that owner’s drawings increases on the left side of the T-account, like an expense,
and owner’s capital increases on the right side of the T-account, like revenue.
