 First major statement is the Balance Sheet  The second major statement is the Income Statement  It would be impractical to include all revenue and expense accounts on the Balance Sheet  Instead, equity calculations can be developed and recorded on the balance sheet

 = Revenue – Expenses  Net income does not include Drawings by the owner(s)

 We must include drawings by the owner(s)  Beginning Capital + Net Income – Drawings = Ending Capital

 Beginning Capital – Net Loss – Drawings = Ending Capital  Note: If liabilities exceeded assets, then the beginning capital figure would be a debit

 Shows an increase in capital, as net income exceeds drawings of the owner

 Shows other possible outcomes that include;  1) Drawings that exceed net income  2) Net loss and drawings  Both of these scenarios reduce Capital  3) Investment in the business and net income exceeding drawings (overall increase to Capital)