In my summary, the amount of the Owner’s Equity was higher than I expected. When we opened the business in May we did pay some expenses out of our own pocket so I knew those were in that account. But when I click through and look at the Owner’s Equity details, I notice all sorts of debits and credits to this account. Since we are a sole proprietorship do essentially all transactions get recorded in here? When I go into one of the entries, I did correctly mark it to be paid from the Checking Account so why does it show up in Owner’s Equity. Thanks for the great product and helpful advice.
Any profit or loss is automatically posted to
Retained earnings which is an account shown under
Typically you don’t really care about balance in equity section. It is what it is. You can verify equity being correct balance by subtracting total assets and total liabilities. The result is your equity.
Assuming your asset and liability balances are correct, equity will be correct. This is one of the principles behind double-entry accounting system.
Whether you call it
Retained earnings (the default account name, but one typically used for corporations rather than proprietorships) or rename it as
Owner's equity, that account is the net of all inflows and outflows since inception. It will, of course, include any capital contributions. But it will also include uncleared expense claims, profit since inception that hasn’t been offset by draws, etc.
Create a test company and make a few sample entries. Begin with nothing, which as a proprietorship you could do. The minute you have income, the account rises.