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Owner's Equity

Business Accounting Bookkeeping The Ultimate Accounting Refresher Course The Accounting Equation - The Basis of Double Entry Bookkeeping
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Transcript

Hello, welcome to this lecture tonight My name is Justin light from thick numbers, and in this lecture we're going to be talking about the owner's equity or equity side of the equation. So in the owner's equity, this is when it increases, it gets credited, and when it decreases, it gets debited, what drives up owner's equity or profit will increase it up. And as you can recall, profit is made up of revenues, which will increase profit and cost which will decrease profit. So let's look at some examples now of all the different types of transactions that could affect your equity account. So when an example could be that you issue new shares in a company, so you're starting a brand new company from scratch, or you're, you've gone through an IPO and you're actually going to issue shares to actually raise capital So what actually happens? Is cash being affected?

Well, yes, there is definitely cash affected because you've raised cash, or you put cash into the business. So this is remember from the businesses perspective, not the shareholders perspective. So there's a cash inflow. So therefore, cash is definitely one of the accounts on this transaction will be affected. What is the nature of this transaction? Well, when you issue shares, you're actually recording people on a register to actually be owners of that business.

So that may indicate to you that the owner's equity, the share capital account is going to be affected. So already those first two questions could help you narrow down the debit and credit. Let's look, is there a future benefit? Well, yes, there's a future benefit because we've got cash to spend down the business, and there's no sacrifice or negative future benefit. And was anything earned costs incurred or assets consumable? No, there's nothing earned by issuing shares, no costs actually incurred, because we've issued shares that's going to cost and no assets being consumed.

So therefore asset is actually going to go up but because that cash at Bank has gone up, we've actually injected some cash into the business. And at the same time, we're going to record the share capital on our owner's equity side. And this is think of it like a almost like a registry of List of shareholders, where the names will be listed with the ownership and that is that will be on the actual the credit side where it will sit. So, therefore, share capital account also known as contributed capital is another term sometimes used in practice. This will actually get credited and the cash at bank account will be debited. So remember debits on the left credits on the right.

It doesn't matter whether it's an asset liability or owner's equity, it follows the same principles around debits and credits, in all cases, next example. You declare a dividend, but you do not pay it to the shareholders. So you declare a dividend. So is cash being affected? Well, no, it's not being affected because in this case, we've not paid anything because The question or the transaction was saying that nothing's been paid. So no, no cash has been affected.

What is the nature of the transaction, we're actually declaring dividend. So when you declare dividends, it is actually a part of your owner's equity, it actually comes off your retained earnings account. So, when you think dividends, you actually need to think this is coming out of your profits. Is there a future benefit future sacrifice or negative future benefit? Well, there is a future sacrifice because we will have to actually pay this in the future. And with anything earned costs incurred or assets consumed, a dividend is actually not considered to be a cost therefore, it does actually it does come out of retained earnings, but does not come off your p&l ever.

So in which case there are no costs incurred. But what actually happens in this case is the liability will increase because we have a dividend that is going to be payable in the future. And at the same time, that we call it dividends paid. It's pretty bit misleading the way that it's called maybe just think of it more as is dividends. But what it actually does is it will actually come out of your owner's equity and be debited, it will actually be debited against your retained earnings account. But think of it as a dividends paid account.

I know that's a bit misleading the fact that's not paid. But just think of it more as dividends, in which case, we debit the dividends or it will eventually become the retained earnings account. So think of it more like retained earnings. And we credit the dividends payable when we actually pay the dividend itself. Cash is being affected because the cash at bank will decrease. So therefore cash is going to be one of the accounts that will be affected by this equation.

What is the nature of this transaction while we're paying our shareholders as dividends? It could be you know, six weeks after we declared it or it could be a few months. Is there a future benefit future sacrifice a lot of future benefits if anything's going to decrease their cash you already know that Cash is going to go down. Is there a future sacrifice? Well, no, not after we've actually paid up the dividend because if anything, it's going to reduce our sacrifice and there are no costs and no nothing earned and nothing's been consumed. So, therefore cash at Bank goes down acid decreases cash or bank we know that and this will go against the liability cap where we actually previously had accrued for this dividend payable.

So, just remember liabilities sometimes they called a crude dividends or dividends payable the terminology can in practice, be interchangeable. When you think payables you think accrued, you think localities so in this case, the dividends payable account will get debited, which will decrease it and the cash at bank will be credited. When we record cash, we record revenue for cash So in which case, cash is being affected? Because we're receiving cash for revenue that's been earned? What is the nature of the transaction? We're actually earning revenue recording revenue?

Is there a future benefit? Will this cash? We already know that? And is anything been earned while we're actually recording revenue? So yes, now this is very similar to the first transaction that we did in assets. So in this case, asset will increase by debiting.

Cash bank account and owner's equity will actually increase profit sales revenue can be credited, which increases profit, therefore, it leads to an increase in owner's equity. And therefore, the sales revenue account gets credited and the cash or bank gets debited. Let's say for example, now we take up some marketing costs and in fact, this could actually be any cost. Let's say we're actually taking any costs up on account. It could be literally any invoice so I'm using marketing as example but it really could be literally It could be fuel, it could be telephone. This is this could apply to any expense that's actually going on account.

So is cash being affected? No. This is actually going on account. What is the nature of the transaction? We're actually taking up some costs on account. So you think costs expenses?

Account is like suppliers counts payable. Is there a future sacrifice? Yes, there's a future sacrifice because we'll have to pay the supplier in the future. So was anything around costing total assets consumed? Well, this case, yes, costs have actually been incurred because we're actually taking up the costs, in this case for the marketing. So what's going to happen is our accounts payable liability account will actually increase gets credited, because we've got a future sacrifice for that actual supply, we'll need to pay them in the future.

At the same time, our owner's equity will decrease because we're actually incurring costs. And what's actually going to happen is we're going to debit the marketing expense, and we're going to credit accounts payable Another example could be we're accruing interest on a new line. So this what this means under accounting, we're actually occurring for the interest that is yet to be paid in the future. So as cash being affected, no, it's not being affected because we're not actually physically paying the interest. We're just occurring for today pull no caches affected. What is the nature of this transaction, we're actually accruing the interest.

So you making accrual of interest, making payable making liability? Is there a future benefit future sacrifice? Yes, there is a future sacrifice because we're actually gonna have to pay this sometime in the future. There is no benefit because there's no benefit to paying money out for interest, and is anything been incurred in earned costs incurred or assets consumed. In this case, there is nothing earned because this is more of something with the payout and costs have been incurred. Because even though we haven't paid the interest, we're actually going to have to, we've actually we've still incurred the actual cost for it.

So in which case, the liability will increase in credited. And that's the accrued interest. Or it could be interest payable is another word you could use as the account name. And the owner's equity account will decrease because our interest expense has actually increased. And what this will actually do is we debit our interest expense and we credit our accrued interest. Okay, so we've now gone through all of the major 25 transactions for assets, liabilities and owner's equity.

This is this is, I would say a majority, probably 90% of the cases of the type of transactions you'll be looking at in most businesses, and particularly in introductory accounting. There are a lot more in practice in terms of like, for example, expense accounts that go into a lot more details around the description of which expense account at the end of the day, it's generally going to follow one of these principles around. For example, taking up a marketing cost and accounting It's going to decrease your owner's equity. And, but the name of the accounts could be quite wide and vast. So there are literally millions of different expense accounts in practice that you could use. So feel free to go over this material again, to really absorb this, we are now going to start to look at General journals and really start to get into putting some some of these transactions into a practical example to be able to create a trial balance.

So I'll see you in the next lecture.

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