The Equity in the accounting equation is made up of three elements – Equity itself plus Revenues less Expenses. Equity can be defined as any capital invested in the business less any capital withdrawn by the business’s owners plus/minus any retained profits/losses.
That can be a bit of a handful first up so let’s look it step by step.
Capital invested in the business can include cash, motor vehicles, land and building. Plus also, basically anything that owner/s decide to invest in the business.
Any capital withdrawn (known as drawings) while is usually cash can include motor vehicles, inventory or anything else the owner wants to withdraw from the business for their own personal use.
The key word is personal use. If a question say “for their personal use” you are looking at a transaction involving drawings.
The third element in equity is retained profits/losses.
Retained profit/losses are simply any profits or losses generated by the business from previous years.
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