Equity represents the owners' investment in a business. It serves as an indication of a company's net worth. Equity is referred to as shareholders' equity on a corporate balance sheet, while the equity account appears as owners' equity on a sole proprietor balance sheet. Equity appears on the right side of the balance sheet along with liabilities. A credit in a company's equity account increases the amount of equity in the business whereas debits decrease equity. A company must journalize equity in the general journal.
1. Record the date of the transaction in the general journal. Indicate the day and month when an owner invests in the business. A bank statement may be used as a supporting document to determine the exact day of the deposit if money was put into a company bank account.
2. Debit an asset account. Write the word "cash" in the general journal if an owner invested cash in the business. Debit the cash account for the amount of the owner's investment in the business. In some cases, a company may provide services to another business in exchange for equity in the business. For example, an accounting firm may provide services to another company in exchange for stock in the company. In this case, the company that receives the accounting services debits an account like "accounting services," since the accounting services represent an asset to the company.
3. Write a credit in the owners' equity account. This illustrates that an owner has made an investment in the business. The amount of the credit entry must equal the "services" or "cash" debit entry, since credits must always equal debits.
Items you will need
- General Journal
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