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The owner's equity is the owner's right on the asset of the business. It is the owner's claim against the asset of the business.

Alternatively, owner's equity can also refer to the difference between the assets and liabilities of the company. 

Along with assets and liability, it is one of the three main components of the accounting equation

Increases and decreases in the owner's equity account are recorded in the owner's equity account.

Components Of Owner's Equity

1. Capital account: When someone invests in his or her company, the amount of the investment is recorded in a capital account.

The capital account is used to record the owner's contributed investment to the business

It's important to realize that the capital account comprises more than just cash; it also includes furniture and other assets brought into the company.

2. Withdrawal account: A person who invests in a business expects to make a profit and to be able to cover personal living expenses with at least a portion of the assets earned from the business operations.

Because a company's income is calculated at the end of the accounting period, the owner often finds it necessary to withdraw assets from the business to cover personal expenses long before the firm's income has been determined.

We do not describe these withdrawals as salary; instead, we say the owner has taken assets for personal use, as per the entity concept

As a result, it is common practice to set up a withdrawal account to record these payments, which are made with the expectation of earning an income.

The withdrawals account is also known as the drawings account.

It is important to emphasize here that corporations do not use a withdrawal account because shareholders can't withdraw money for personal use, even if the company is held by a single person.

3. Revenue and expense account: Revenues are the monetary inflows that come from the company normal line of operation

Revenue increase owner's equity. The greater the revenues, the more owner's equity increases. The lesser the revenues, the more owner's equity decreases.

Expenses, on the other hand, are the outflow of money that results from the company normal line of operation.

Expenses decrease owner's equity. The greater the expenses, the more owner's equity decreases. The lesser the expenses, the more ower's equity increases.

Of course, when revenues are greater than expenses, we have a net increase in owner's equity. This is referred to as net profit.

Conversely, when expenses are greater than revenues, we have a net decrease in owner's equity or a net loss.

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