Owner's Equity is not just another pretty phrase

Accounts are used to indicate and summarize the increases or decreases to and balances of each asset, liability and owner's equity-type items, such as, capital, withdrawals, revenues and expenses.

The names of accounts sometimes seem strange at first. This section is intended to help you learn or memorize owner's equity-type account names.

OWNER'S EQUITY, as a whole, is what the business owes the owner. It consists of different categories of accounts, each of which serve a special purpose. The business owes the owner for any monies they invest in the business. The business also owes the owner for any profit it makes. The owner must absorb any loss the business suffers. In order to know if and how the business makes profit or suffers losses, it is necessary to keep the different revenues and different expenses separate for a period of time. This helps the management of the business analyze the results of its operations. If the owner takes any assets out of the business, the business owes the owner that much less. It is good for the owner to know how much they have taken out over a period of time so this amount is kept separate for a period of time also.

(Owner's Name), Capital is the main owner's equity account. The amounts in all the other owner's equity accounts are eventually recorded in the Capital account. Any monies the owner invests in the business are entered directly into this account.

(Owner's Name), Withdrawals or Drawing account sums the assets (cash, inventory, etc.) that the owner takes out of the business for personal use. The amount in this account is eventually recorded in the Capital account and decreases the Capital account.

Revenue is what a business earns for what it is in business to do. For example, what a dry cleaning business charges for cleaning a suit is revenue. Revenue accounts can have many different names, but normally fall into one or two categories: service revenue or sales revenue. The amounts in revenue accounts are eventually put in the Capital account and these amounts increase the Capital account.

Expenses are the cost of generating revenues. In other words, expenses are the cost of doing business. There are many different kinds of expenses with many different names, but they normally fall into two or three different categories: cost of goods sold, selling expenses, general and administrative expenses. Almost all expense account names, with the exception of Cost of Goods Sold, end with "expense", such as, Wage Expense, Rent Expense, etc. The amounts in expense accounts are eventually put in the Capital account and these amounts decrease the Capital account