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Here is basically a cut and paste of the write-up from the equivalent lesson for QuickBooks Online. The fact that I can do this, is further proof, that the fundamentals are exactly the same, no matter the software.
Before you can understand how to manage owner’s equity in Xero, you must understand the fundamentals of owners equity.
When you invest in your business, you increase the equity of your business. When you take a distribution, you decrease the equity of your business.
Equity, or shareholder’s equity, or owners equity, or partner, or member capital, all mean the same thing. What is the book value of the business as of a given date?
When we talk about Owner’s Equity in Xero, we’re simply talking about, how the Xero Accounting software let’s us manage owner’s equity.
This is best described in terms of the transactions that impact owner’s equity in Xero.
Equity is in the bottom most part of the balance sheet. If you take your assets, and subtract your liabilities, you have owner’s equity. This is how the balance sheet balances.
Equity accounts work just like liability accounts. They are increased by credits, and decreased by debits. If you follow the cash, in a simple investment transaction, it makes sense.
Invest $1,000 into your business, and the entry is:
Debit Cash $1,000
Credit Equity $1,000
If you can get this basic foundation of Equity down, then the rest is easy to figure out.
Now let’s take this one step further. Your small business owner client comes to you and says, “Hey I got a bunch of inventory that I paid for out of my own pocket. How do I book that in QuickBooks?”
This is actually about 3 steps further. Let’s see what this looks like in the video – you have to bring the inventory onto the books, with the appropriate quantities and values, but they’ll never be paid for.
The simple entry is to record an owner contribution of inventory on the books is:
Credit Shareholder’s Equity
The problem with posting a journal entry, is you won’t have the right inventory tracking by item.
Let’s see how to post the two types of equity transactions above, in the video on QuickBooks Online – Shareholder’s Equity.