Profits Increase / Losses Decrease Owner's Equity Account

Losses Decrease Owner's Equity Account

Losses decrease Owner’s Equity Account as loss are deducted in the calculation of owner’s equity account.

Owner’s Equity = Opening Capital + Additional Capital + Net Profit - Net Loss - Drawings

For example, Assets = Rs. 20000, Liabilities = Rs. 10000, Owner’s Equity = Rs. 100000. The net loss of Rs. 50000 for the period is reported in Income Statement of a sole proprietor’s business, Mr. A, then in Accounting Equation, we get the following

 

Assets = Liabilities + Owner’s Equity - Net Loss

                                                                 20000 =     10000      +     600000            -     50000

                                                                 20000 =     10000      +      10000

                                                                 20000 =     20000

 

Net Income / Net Profits Increase Owner’s Equity

Net Income or Net Profits increase owner’s equity as these are added to owner’s equity. A business will earn profits due to profitable activities conducted during the accounting period.

The formula for the calculation of owner’s equity is shown below:

Owner’s Equity = Opening Capital + Fresh Capital Introduced + Net Income - Drawings

For example if the business of Mr. A, a sole proprietor, earn profits during the period Rs. 100000, then this is added to owner’s equity or closing capital and as a result owner’s equity increases.

In the accounting equation, we have following:

 

Owner’s Equity = Rs. 300000

Liabilities = Rs. 100000

Assets = Rs. 500000

 

Assets = Liabilities + Owner’s Equity + Net Income

                                                             500000 =     100000   +       300000          +     100000

                                                             500000 =     100000   +       400000

                                                             500000 =      500000

So, we see owner’s equity increases from Rs. 300000 to Rs. 400000 as a result of Net Profit or Net Income earned by the business during the accounting period.

Finally, we can say that, Net Income Or Net Profits Increase Owner’s Equity Or Closing Capital As These Are The Profitable Activities Of The Business Conducted During The Accounting Period while in case of losses, we see that the losses decrease owner’s equity as these are suffered by the business due to non profitable activities conducted during the accounting period.