in this video we're going to learn about owner's equity accounts the basic owners equity accounts
and how they behave we all know that every account in your chart of accounts has a debit side and a
credit side and depending on the type of account sometimes the transactions are listed on the
debit side for certain types of accounts and on the credit side for other types of accounts
the most important owner's equity account is the owners capital this is an account in your
chart of accounts that reflects or shows the total money or value that the owner took from
his or her personal funds or personal assets and put into the business and of course every
chart of account should have a separate account for each separate asset so you can account for
how much value of that asset is in the business in this example let's imagine that the company
has $10,000 in cash and the company has $20,000 worth of equipment well if that's the case when
the company starts that means that the owner of the company has invested $30,000 worth of assets
into the business and the account that keeps track of how much the owner has invested in the business
should say $30,000 now of course the owner should also have a separate account called withdrawals
the reason for that account is to keep track of and take a total of all the money or all the
assets that the owner took out of the business for personal non-business use for example if the owner
takes $2,000 of company cash out of the business for non-business use that means that he or she
would have to record that $2,000 in withdrawals and the new amount of cash that the company has
would be $8,000 the owner could also take home any other asset like equipment for example if
the owner took home $5,000 worth of equipment you would still have to record a withdrawal of
access from that owner of $5,000 that means the new value of equipment would go down to 15,000
and the new balance of the withdrawals account is $7,000 so as you can see the owner took invested
30,000 from his or her personal funds into the business but withdrew $7,000 of cash and other
assets from the business and obviously you would have to net out these two accounts to know that
the actual amount of owner's equity that the owner has in this company is $23,000 so then you might
ask how do you distribute the net income from the income and expenses accounts to the owner's
equity accounts well we will use the same two owner's equity accounts we used a minute ago
except now we're showing other accounts in the chart of accounts let's imagine at the end of
the quarter or the end of the fiscal year the service income is 20,000 and let's imagine in
this example company there are only two expenses 6,000 and 4,000 here now this example is showing
you how to distribute the income when the company is a sole proprietorship that means there's only
one owner in order to find out what the net income is as well as distribute it or give to the owner
or put into the owner's equity account the net income we use a special account in the chart of
accounts called income summary this is a temporary account that begins with 0 and also ends with 0
when we're finished we make a series of debits and credits in order to move the income to the
income summary account and make all our income accounts 0 we also move all of our expenses to
the income summary account and make the balance of all of our expenses zero and the days before
the computer this would help make sure that the incumbent expenses do not accumulate into the next
accounting period and they begin with zero at the beginning of this fiscal year or this accounting
period with the computer it's not necessary to do it this way anymore but at least we know in
the income summary account that we can calculate the net income as $10,000 that's because we moved
20,000 to the credit side and that was the income we moved 10,000 worth of expenses to the debit
side and the net difference shows 10,000 more on the credit side than on the debit side so we
know the 10,000 is the net income as I mentioned a moment ago income summary also becomes zero we
take the ending balance of income summary and we bring it to the owners capital account this makes
sure that the owners capital reflects not only what they invested from their own personal pocket
but what they earned as their share of the net income and of course the last step in the closing
process is to move the owners withdrawals also to the owners capital account this way withdrawals
also starts with zero for the next accounting period so you can clearly identify the withdrawals
just for that time period and when you find the end result of the owner capital we can see in
this situation the owner is left with $23,000 of owner's equity all of which will be in the owners
capital account when you finish doing the closing entries if you need to know how to make debits and
credits you can watch the supplementary videos about journal entries included in this course
but the end result is that we now know the ending period capital for this fiscal year which is also
the amount of capital that will begin as the beginning balance in the next fiscal year now
let's see what it's like to distribute the net income in a partnership here we have a situation
where the company has two owners holden and gary and as you would imagine each individual partner
has to have their own capital account which keeps track of the amount that they physically invested
into the business and each partner should have their own withdrawals account that keeps track of
how much money or asset that particular partner took out of the business so these numbers for
Holden are left over from the previous example Holden invested a total thirty of thirty thousand
of cash or other assets from his personal funds and he was drew seven thousand from the business
for non-business reasons whereas Holden's partner Gary only invested twenty thousand
from his personal funds and he withdrew a total of three thousand from the business so far this
fiscal year now let's imagine in this example holding to Gary's share the profits 60 percent
holden and 40 percent Gary so just like in our previous example income summary is the account
where all the incumbent expenses get close to so we can determine the net income and distribute the
net income to the partners but in this example we see that the the net income is the same as
the net income in the previous example except sixty percent of it belongs to Holden and the
other forty percent of it belongs to Gary that means that Holden will have an increase of six
thousand in his capital and Gary will have an increase of four thousand in his capital when we
finally make income summary zero to distribute the net income now of course both owners have
to net out their own withdrawals into their own capital account so the seven thousand of holdings
withdrawals gets close to Holden capital and the 3,000 of Gary's withdrawals gets close to Gary's
capital and Holden's capital or total owner's equity at the end of this fiscal year is 29,000
up here and Gary's owners equity at the end of this fiscal period - 21,000 now we need to clarify
something about our new friend income summary we all know income summary is where we move all of
the accumulated income for the fiscal year and all of the accumulated expenses of the fiscal
year this way the income and expense accounts don't accumulate into the next period and we can
isolate exactly how much income and expense came in and out during a particular time period and
the income summary will give us our net income but you should know that income summary is a temporary
account the account that we actually use as a permanent account to show the difference between
income and expense in a prior accounting period is called retain earnings so retained earnings
will still show the difference between income and expense in but only in a prior period and
that's how QuickBooks works so for example if you look at report dated in the current period
you will see the income and expense and you will not see them and retain earnings however if you
look at a report dated after the fiscal year end you will not see any income or expense accounts
listed instead you will see the net amount as net income or at least the accumulated net income
in the retained earnings account for example if Holden's fiscal year ends on June 30 and he report
dated before June 30 will show this the income in the income accounts the expense and the expense
accounts and nothing in retained earnings however any report dated after June 30 will show that you
have zero income in expenses and the net amount of net income has been moved to retain earnings