OWNER’S EQUITY is the residual claim against the assets of the business after the total liabilities are deducted. If a corporation is in consideration, owner’s equity is sometimes referred to as stockholder’s equity. CAPITAL is the owner’s equity in a sole proprietorship or a partnership operation. For a corporation, capital stock represents the investment of the stockholders and retained earnings represent the net income in the business. Drawings represent the amount of withdrawals made by the owner of a sole proprietorship. For a corporation, dividends represent the distribution of earnings to the stockholders. Most of us in our farm/ranch operations do not have corporations, yet this is viable and needs to be discussed briefly. We are beginning to see more and more corporate farming coming to the rural areas. This is partially due to the legalistic world we are living in. Many entities perceive that everyone in the Ag-community are extremely wealthy. If there is anything that can be construed as open to the possibility of a lawsuit, then it becomes a reality.
REVENUES are the gross increases in owner’s equity as a result of the sale of merchandise or products, the performance of services for a customer or a client, the rental of property, the lending of money, and other business and professional activities entered into for the purpose of earning income. Revenue from sales of merchandise or sales of services is often identified merely as sales. Other terms employed to identify sources of revenue include professional fees, commissions, revenue, fares earned, and interest income. If an enterprise has various types of revenue, a separate account should be maintained for each.
EXPENSES are the costs that have been consumed in the process of producing revenue and expired costs or expenses. The number of expense categories and individual expense accounts maintained in the ledger varies with the nature and the size of the enterprise. A large business with authority and responsibility spread among many employees may use an elaborate classification and hundred of accounts as an aid in controlling expenses or at least categorizing them. For a small service business a modest number of expense accounts will generally be satisfactory.