In accounting there are a few terms and accounts used that refer to movements of assets by the owner.
Assets, usually in the form of cash or goods are given to or taken from the business.
Let’s explore some examples.
Owners Investments and Contributions
These are assets or funds introduced to the business to start trading and keep it running.
At the end of each year the balance on this account is transferred to the owners capital account.
Owners Capital Account
Each time the owner gives more funds to the business the owners capital account will increase.
This can also be in the form of retained earnings.
If any profit is reinvested into the business this will increase the capital and therefore stake in the business.
Knowing the position of the capital account is essential in order to know how much can be withdrawn from the business each year.
Owners Drawings or Distributions
These work in the opposite way. When funds are taken out of the business this reduces the owners capital account.
If too much money is taken from the business it might result in paying higher taxes.
Owners Equity or Net Assets
This is the owners claim on the business after all debts have been paid.
Owners can calculate this by adding up all capital, contributions and revenue and deduct withdrawals and expenses.
Knowing how financial movements affect a business is vital.
It will enable a business owner to ensure there are available assets to continue to operate, grow and be successful.