Owners Equity Example

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Previous lesson: Basic Accounting Transactions
Next lesson: Liability Example

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Welcome to our first example of a basic accounting transaction - this one dealing with owners equity.

Throughout this owners equity example and the ones that follow, we'll be using a business called George's Catering to illustrate each of the transactions.

Alright, so let's look at an example of owners equity.

George Burnham decides to start his own business, George’s Catering.

At this stage the balances of each of the elements of our accounting equation are $0:

a) What is the first thing George is going to do? He’s going to invest in the business (he’s going to put some assets into the business). George decides to invest $15,000 of his personal funds into the business’s bank account.

What happens to our equation? 

George’s Catering now consists of assets (money) of $15,000.

So the first account that is affected is bank (or cash).

An Example of Capital

Now, a business is started by the owner.

The owner invests his assets in the business so that the business will produce a profit for him.

There is a specific name for the investment of assets in a business by the owner or owners.

The investment of assets in a business by the owner is called capital.

When the owner invests assets in a business, the owner’s stake in the business (the owner’s equity) increases , because it is his assets.

Notice that liabilities (debts to external parties) are unaffected. Their stake in the assets of the business does not change (still $0), because they had nothing to do with this. 

As you can see above, both sides of the equation are affected – one to increase the assets, and one to increase the owner’s equity.

In other words, we are showing that the owner has put in more assets to the business, and these assets belong to him. 

Test Yourself!

Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.

Difficulty Rating:
Beginner

Quiz length: 
2 questions

Time limit:
4 minutes

Important: The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.

Good luck!

This Form cannot be submitted until the missing fields (labelled below in red) have been filled in
Owners Equity Example Mini Quiz:
Please note that all fields followed by an asterisk must be filled in.
1. The investment of assets in a business by the owner is called _________.*
a) Investments. b) Long-term assets. c) Owner's equity. d) Capital.
2. Which elements of the accounting equation are affected when the owner puts money into the business?*
a) Assets increase and liabilities increase. b) Assets increase and liabilities decrease. c) Assets increase and owner's equity increases. d) Assets increase and owner's equity decreases. e) None of the above.
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Well, that's it!

I hope this owners equity example has given you a better understanding of what happens when the owner invests capital.

Go ahead and click through to the next lesson - an example of a transaction involving a liability.

Check out the advanced lesson on the Owners Equity Example (including the debit and credit journal entry)

Return from Owners Equity Example to Basic Accounting Transactions 

Return to the Home Page 

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Previous lesson: Basic Accounting Transactions 
Next lesson: Liability Example

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