Book 1 - Chapter 21

10.

These accounts are the owner’s capital account, revenue accounts, expense accounts, and the
drawing (withdrawals) account. The capital account shows the cumulative balance of owner’s
equity, except for the current period revenues and expenses and withdrawals. Revenue accounts
show the current period increase in owner’s equity that result from making sales of services or
merchandise. Expense accounts show the current period decrease in owner’s equity as a result
of consuming resources to operate the business and make sales. The drawing account records
the value of the assets that the owner has withdrawn from the business in the current period.
(Owner investments are recorded directly into the capital account.)

11.

	Capital account: normally right side, but can have a left-side balance if the business has had greater cumulative net losses than net income.
	Revenue account: right side
	Expense account: left side
	Drawing account: left side

12.

$10,000 + $2,700 – $1,800 – $1,000 = $9,900

13.

Owner investments are recorded directly into the capital account. This is a right-side entry
because an owner investment increases the owner’s equity.

Reinforcement Problems
LG		21-1.

a.	Accountants use the accounting equation as a reference to decide which side of an account will be the natural positive side. Because the owner’s capital is on the right side of the equation, the natural positive side of the owner’s capital account is its right side.
b.	Revenues, expenses, and owner withdrawals are all types of changes in the owner’s capital. Because these changes are numerous and frequent, and because they have a powerful effect on the success or failure of a business, they must be monitored very closely. To follow these changes carefully, they are assigned individual accounts. This permits more accurate observation than simply recording them all together in the owner’s capital account.
c.	Decreases in the owner’s capital account are recorded on the left side of the account. So, if the decreases in the owner’s capital are subdivided into expense and drawing accounts, these “decrease accounts” should have left natural positive sides because the amounts recorded are decreases in the owner’s capital.
d.	Expenses and owner drawings decrease the owner’s capital.
e.	Revenues are sales transactions that cause the owner’s capital to increase. Increases to owner’s capital are recorded on the right side of the account. Therefore, because revenues increase owner’s capital, revenue increases should be recorded on the right side of an individual revenue account.

LG		21-2.
		Yes. The owner’s capital account can have a negative balance. This happens when liabilities exceed assets. This situation happens when a business consumes resources in a way that does not add enough value, so not enough assets are received from customers to replace the value of resources used up. A negative balance in a capital account is the amount of money an owner must invest so the business will have enough assets to pay off all the debts.

Learning Goal 21, continued

SOLUTIONS

Section V · Using a Basic Accounting System

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