Accounting Cheat Sheet For Transactions (Page 3 of 6) in pdf

Page 3 of 6

use one or the other.

Formal Definition:The owner's rights to the property (assets) of the business; also called proprietorship and

net worth.

Informal Definition:What the business owes the owner. The good stuff left for the owner assuming all

liabilities (amounts owed) have been paid.

Additional Explanation:Owner's Equity (Capital) represents the owner's claim to the good stuff (assets). Most

people are familiar with the term equity because it is so often used with lenders wanting to loan individuals

money based on their home equity. Home equity can be thought of as the amount of money an owner would

receive if he/she sold their house and paid off any mortgage (loan) on the property.

Revenue (Income), Expenses, Investment, and Draws

Revenues, expenses, investment, and draws are sub categories of owner's equity (capital).

Think of owner's equity as a mom named Capital with four children to keep up with (I know

she's only got one clinging to her leg but she left Expense, Investment, and Draws at home).

The kids are named Revenue, Expense, Investment, and Draws and each kid has one job that

they are responsible for in order to earn their allowance. Kid Revenue is responsible for

keeping track of increases in owner's equity (Ma Capital) and Kid Expense is responsible for

keeping track of decreases in owner's equity (Ma Capital) resulting from business operations.

Kid Draws has the job of keeping up with decreases in owner's equity (Ma Capital) resulting

from owner withdrawals for living expenses and other personal expenses. Kid Investment has

the job of keeping up with increases in owner's equity (Ma Capital) resulting from additional

amounts invested in the business.

Revenue also called Income

Formal Definition:The gross increase in owner's equity (capital) resulting from the operations and other

activities of the business.

Informal Definition:Amounts a business earns by selling services and products. Amounts billed to customers

for services and/or products.

Additional Explanation:Individuals can best relate by thinking of revenue as their earnings/wages they receive

from their job. Most business revenue results from selling their products and/or services.

Expense also called Cost

Formal Definition:Decrease in owner's equity (capital) resulting from the cost of goods, fixed assets, and

services and supplies consumed in the operations of a business.

Informal Definition:The costs of doing business. The stuff we used and had to pay for or charge to run our

business.

Additional Explanation:Some examples of personal expenses that most individuals are familiar with are

utilities, phone, clothing, food, gasoline, and repairs. Some examples of business expenses are office supplies,

salaries & wages, advertising, building rental, and utilities.

Owner's Investments

Formal Definition: Increase in owner's equity (capital) resulting from additional investments of cash and/or

other property made by the owner.

Informal definition: Additional amounts, either cash or other property, that the owner puts in his business.

Additional Explanation:Although these amounts can be kept up with as a separate item, they are usually

recorded directly in the Owner's Capital Account. In other words, immediately put into Ma Equity's purse.

Owner's Drawing

Formal Definition: Decrease in owner's equity (capital) resulting from withdrawals made by the owner.

Informal definition: Amounts the owner withdraws from his business for living and personal expenses.

Additional Explanation:The owner of a sole proprietorship does not normally receive a "formal" pay check

from the business, but just like most of the rest of us needs money to pay for his house, car, utilities, and

groceries. An owner's draw is used in order for the owner to receive money or other "goodies" from his

business to take care of his personal bills.

Accounting Cheat Sheet For Transactions Page 3

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