CHAPTER 3: Starting a Proprietorship: Changes That Affect Owner’s Equity

NEW ACCOUNTING TERMS:  Revenue — An increase in owner’s equity resulting from the operation of the business Sales; Fees  Expense — A decrease in owner’s equity resulting from the operation of the business Advertising Expense; Utilities Expense; Rent Expense  Withdrawals — Assets taken out of a business for the owner’s personal use John Smith, Drawing

HOW REVENUE, EXPENSE AND DRAWING CHANGE THE ACCOUNTING EQUATION Assets =Liabilities + Owner’s Equity Revenue – Increase Expense – Decrease Drawing – Decrease

HOW TRANSACTIONS CHANGE OWNER’S EQUITY Received cash from sales $2000 Cash is increased and Owner’s Equity is increased Sales is a revenue account and revenue accounts increase owner’s equity Paid cash for rent $800 Cash is decreased and Owner’s Equity is decreased Rent is an expense account and expense accounts decrease owner’s equity Paid cash to the owner for personal use Cash is decreased and Owner’s Equity is decreased The owner is withdrawing from the company, therefore, the Drawing account decreases owner’s equity

TRANSACTION TABLE ASSETS = LIABILITIES OWNER'S EQUITY Cash PPD InsuranceSuppliesBiggler Co John Smith, Capital (Revenue) (Expense) (Drawing) 4 + Transactions that change Owner’s Equity: 1.Received cash from sales $ Paid cash for rent $800 3.Paid cash to owner for personal use $500