changes to The ‘Capital’ Account

Our Capital Account is made up of: Revenue Expenses Drawings

Where else do we see Revenue and Expenses? The Income Statement! Revenue Expenses ------------------ = Net Income (Net Loss)

There is a connection: Beginning Capital + Net Income - Drawings -------------------------- = Ending Capital

The Balance Sheet The Balance Sheet is where we usually see the Owner’s Equity section. (And where the Capital account is listed.) In order to make sure it is up to date, we must reflect the changes to Capital (ie. the changes to Revenue, Expenses, Drawings) of that amount!

To find our new Capital amount: we must calculate: Beginning Capital + Revenue - Expenses - Drawings ---------------------------- = Ending (our new) Capital Net Income or (Loss) ** Please write this down. **

Example 1 Capital at the beginning of the year is $4000. Net Income for the year is $1000. Drawings is $0. How much is the Capital account at the end of the year?

Example 2 Owner’s equity at the beginning of the year is $20,000. Revenue for the year is $20,000. Expenses are $5,000. Drawings are 5,000. What is the owner’s equity (capital) at the end of the year?

Example 3 Capital starts the year at $100,000 There is a net loss of $40,000 There are drawings of $10,000 What is the Capital account at the end of this fiscal period?

homework Complete the handout for Exercise 1 & 2 on page 140. Complete the ‘Comprehensive Case’ package you have been given.