Chapter 2
Linking Personal Accounting to Business Accounting
31
ASSETS
OWNER’S DRAWINGS
EXPENSES
OWNER’S CAPITAL
REVENUE
LIABILITIES
Increase
Increase
Increase
Increase
Owner’s Equity
Assets
=
+
Liabilities
Increase
Increase
Decrease
Decrease
Decrease
Decrease
Decrease
Decrease
______________
FIGURE 2.4
We will illustrate the T-account entries related to the owner’s capital and owner’s drawings with
an example. Suppose that the owner of a newly formed company invested $10,000 in cash into the
company (transaction 1).This will increase owner’s capital and increase cash. For simplicity, assume
that all opening account balances are $0.
Also suppose that the owner withdrew $1,000 from the company for personal use (transaction 2).
This transaction will cause cash to decrease and owner’s drawings to increase. These transactions
related to owner’s equity are summarized in Figure 2.5.
+
CASH
-
INCREASE
DECREASE
-
OWNER’S DRAWINGS
-
OWNER’S CAPITAL
+
DECREASE
INCREASE
1.
1.
2.
10,000
10,000
1,000
$1,000
$10,000
$0
$0
2.
1,000
$9,000
Opening
Balance
Opening
Balance
INCREASE
DECREASE
+
______________
FIGURE 2.5
Financial Statements of Different Types of Businesses
Different types of businesses use different financial statement layouts: a small consulting firm
would use a very simple income statement and balance sheet compared to a complex manufac-
turing company that produces goods. The manufacturing company requires a more detailed set
of financial statements, which provide the information a manager needs to know to operate the
business effectively.
The following examples display financial statements for three main types of businesses.
