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.
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.