U2 L7Equity on the Balance Sheet - Equity on the Balance...

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Equity on the Balance Sheet We now know that businesses record their revenues, expenses, and drawings directly into these accounts in the ledger. We also know that these accounts affect the equity of the business. In this lesson, we will see how drawings and net income/loss (as determined on the income statement) impacts the equity section of the balance sheet. We have learned that, during an accounting period, revenues earned, expenses incurred, and drawings taken from the business are recorded directly into their own accounts in the ledger . Although these items affect capital, they are no longer recorded into the capital account. Therefore, at the end of an accounting period, the capital account must be updated with the value of revenues , which increase capital, and with the values of expenses and drawings, which decrease the value of capital. Therefore, the equation to calculate equity at the end of an accounting period is as follows: Ending Capital = Beginning Capital* + Revenues – Expenses – Drawings *Beginning Capital represents the balance in the capital account at the beginning of the period. Since the difference between revenues and expenses is net income (or net loss ), the equation can also be written as:
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