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Owner’s equity represents the owner’s claim of assets of the business. Because liabilities or creditors’ claim have a legal priority over the owners’ claim. Owners’ equity is a residual amount. If you are an owner of a business, you are entitled to all such assets that are left after the claims of creditors have been satisfied in full. Therefore, owners’ equity is always equal to total assets minus total liabilities.
To understand this term remember business is an artificial body separate from its owners.
Equity means the source of funds provided to start or to operate a business entity. The question is who will be a provider of funds to the business, so there are two sources of funds;
1 Funds supplied by the owners
2 Funds supplied by the external parties like banks
So the amount of cash or goods invested by the owner in a business unit is called owners equity
The capital is the money borrowed by a business from its owner is the owner’s equity.
Mr. A started a business with rupees 100,000 out of this 70,000 have been provided by the owner B and 30,000 have been borrowed from the bank. In this situation, only 70,000 will be the owner’s equity. Accounting entry will be;
Cash account 100,000
Capital account 70,000
Bank loan 30,000
Owners’ equity doesn’t represent a specific claim to cash or any other particular asset. Rather, it is the owners’ overall financial interest in the entire company.
Increase in owners’ Equity:
The owners’ equity in a business comes from two sources:
1. Investment of cash or other assets by owners
2. Earnings from profitable operation of the business
Decrease in owners’ Equity:
Decrease in owners’ equity is also are caused in two ways:
Payment of cash or transfers of other assets to owners
Losses occurred from operation of the business.
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