What is included in Owner’s Equity?
Owner’s equity mainly includes the following categories, which either increase or decrease an owner’s overall equity:
1. Capital Investment from the Owner (increase): Many business owners start their business by investing their own money. So, their own money is included in the owner’s equity.
2. Retained Earnings (increase) & Reserves: Businesses generally keep retained earnings and make reserves as backup funds or internal sources of finance to be used against contingencies. There are situations when no contingencies arise, and as a result, it gets included in the owner’s equity.
3. Money Withdrawn by Owners (decrease): In sole proprietorship, owners can withdraw money from business as and when they want for any personal or other purposes. This withdrawal causes a decrease in the owner’s equity.
4. Losses Generated by Business (decrease): In today’s dynamic world, businesses are vulnerable to losses. Continuous losses erode owner’s equity.
5. Dividends and Distributions (decrease): Dividends and other financial distributions are paid from a business’s net income, which would otherwise go into retained earnings. Payment of dividends cause a decrease in the owner’s equity.
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