Transactions affecting owner's equity include

Question

BlackTom AI · Accepted Answer

Owner's equity increases when the owner invests cash or when the business earns revenues, and it decreases when the owner withdraws assets or when the business incurs expenses.

1. Relevant knowledge points and concepts
- Accounting equation: Assets = Liabilities + Owner’s Equity. Any transaction that changes owner's equity will affect this equation.
- Components of changes in owner’s equity: owner’s investments (capital contributions) and revenues increase equity; owner’s withdrawals (drawings) and expenses decrease equity.
- Revenues and expenses flow through the income statement and change retained earnings (or owner's capital) at period end.

2. Step-by-step reasoning
- Owner’s investment: When the owner contributes cash, assets (cash) go up and owner’s equity (capital) goes up by the same amount.
- Owner’s withdrawal: When the owner takes cash out, assets (cash) decrease and owner’s equity decreases.
- Earning revenues: Generating sales increases assets (cash or receivables) and increases owner’s equity through increased retained earnings.
- Incurrence of expenses: Paying or accruing expenses reduces assets (or increases liabilities) and reduces owner’s equity through decreased retained earnings.

3. Calculations (example with intermediate steps)
Start equity = $10,000.
- Owner invests $2,000: Equity = $10,000 + $2,000 = $12,000.
- Business earns revenue $3,000: Equity = $12,000 + $3,000 = $15,000.
- Business incurs expenses $1,200: Equity = $15,000 − $1,200 = $13,800.
- Owner withdraws $800: Equity = $13,800 − $800 = $13,000.
This demonstrates how each listed transaction changes equity.

4. Why the correct answer is correct
Each listed item directly affects owner’s equity by increasing or decreasing capital: investments and revenues increase equity; withdrawals and expenses decrease equity. They are the primary transaction types that change owner’s equity.

5. Why other transaction types do not belong (brief)
Transactions that merely convert one asset to another (e.g., buying equipment with cash) or increase a liability (e.g., taking a loan) do not change owner’s equity immediately; they change asset and liability balances without affecting equity unless they involve revenues, expenses, investments, or withdrawals.

6. Conclusion
Therefore the transactions affecting owner’s equity are owner's investments, owner's withdrawals, earning of revenues, and incurrence of expenses — which matches the provided answer.

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