Withdrawals are the amount money used by the owner of the business for personal purposes, and they include assets and cash. In most cases, they are recorded in the owner's drawing account, and they affect the owner's equity. In other words, it is part of owner's equity used for personal expenses and does not relate to the business. The September transaction of Mia Wong’s law firm can be analyzed using an expanded accounting equation.
Owner’s Equity= Initial Capital (Plus Additional Investment) + Net Income (Revenue-Expenses) – Withdrawals
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Owner’s Equity (Net Income) = 6200(+3600) +3700- 1000 = $9800
Owner’s Equity (Net Loss) = 6200 (+700) + (-400-100)-500 = $6400
Also, it is important to note that withdrawals are not part of the business expense and thus, they are not incorporated in the income statement. As summarized in the statement of the owner’s equity $9,800 will be the initial capital in the next financial period.
Net Income
Net income is the positive balance after offsetting the total revenue and total expenses. In other words, net income is achieved in the income statement when the total revenue exceeds the total expenses. In the case of Mia Wong income statement, revenue is a subdivision of the increased owner’s equity as well as the assets. The expenses include all the expenses incurred by the company in carrying its operations. As the withdrawals and expenses increases, the owner’s equity decrease. The total revenue which was generated from the legal fee was equal to $5,000. On the other hand, the operating expenses were ($1300) $7,000, $400, and $200 for salary, rent, and advertisement expenses. After offsetting the available revenue and expenses, the Net income was equal to $3700 ($5000-$1700).
Total Revenue
Total revenue includes all the earnings from the company operation. In this case, the Mia Wong is a law firm. Thus it earns from the legal fee and other related commission. For the month ending September, the total legal fee amounted to $5000. Revenue is received in the form of cash, and according to the accounting equation, an increase in revenue increases the owner’s equity.
Total expenses
Expenses incurred by the company are recorded in their respective expense account whether they have been paid or not. Also, it is important to note that an increase in the expenses decreases the owner’s equity. The operating expenses incurred was ($1300) $7,000, $400, and $200 for salary, rent, and advertisement expenses.
Reference
Slater, J. (2012). College Accounting Chapters 1-12 with Study Guide and Working Papers+ New Myaccountinglab with.. . Prentice Hall.
