Lessons · Accounting · the owner puts money in
The owner puts money in
Money the owner puts into the business is not revenue; it is equity: Dr Cash, Cr Owner's capital. Money the owner takes out is drawings, and it reduces equity.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
On opening day the owner moves 20,000 from a personal account into the business. If that were recorded as sales, the first month would show a profit nobody earned, and the owner would be taxed on their own money.
How to think about it
Ask who the money is from. A customer: revenue. A lender: a liability. The owner: equity, every time, and the same in reverse when they take it out.
Worked example
Dr Cash 20,000 / Cr Owner's capital 20,000The owner's stake goes in. Asset up, equity up, no revenue anywhere.
Owner takes 1,500 for personal use: Dr Drawings 1,500 / Cr Cash 1,500Drawings is a running total of what the owner has taken; it counts against equity.
Equity = 20,000 − 1,500 = 18,500Capital less drawings, before any profit is added.
Your turn
The owner puts 5,000 cash into the business. Write the credit line.
Dr Cash 5,000 / Cr 5,000
Solve one, graded on the server
The trap
Counting the owner's money as sales because it arrived in the bank like a sale does. Where money comes from decides the account, not the fact that it came.