How Revenue and Expenses Affect Capital?

Revenue and Expenses = directly affect owner's equity.
If a business earns revenue, there is an increase in owner's equity.
If a business incurs or pays expenses, there is a decrease in owner's equity.

For the present, think of it this way: if the company makes money, the owner's equity is increased. On the other hand, if the company has to pay out money for the costs of doing business, then the owner's equity is decreased.

Revenues and expenses fall under the umbrella of owner's equity:

1. revenue increase owner's equity;
2. expenses decrease owner's equity.

Recording Revenue

If revenue of $550 is received by the business, this revenue should be recorded as an increase Cash of $1,550 and resulting increase in proprietor's capital of $1,550.
Revenue may be received in forms other than cash. An organization may receive payment for services rendered in the form of other assets such as supplies, equipment, and even someone's promise to pay at a future time (accounts receivable).

The effects of the accounting equation will still be an increase in the specific asset received and a corresponding increase in capital.


Recording Expenses

Every business, regardless of its nature, must incur certain costs in order to operate. These costs are known as expenses. Expenses are generally referred to as the "costs of doing business." Examples of business expenses are rent expense, insurance expense, salary expense, and supplies expense.
If the company pay rent of $500, it decrease in capital.

The effects of the accounting equation will decrease in owners equity.