Owner's equity, often referred to as shareholder's equity, is a critical part of the accounting equation. It represents the owner's claims to the assets after liabilities have been subtracted. Essentially, it reflects what is left for the owner after all debts are paid. Think of it as a snapshot of the company’s net worth.
Owner's equity includes:
- Capital Contributions: Funds that the owner invests into the business, adding to the equity.
- Retained Earnings: Profits that have been reinvested in the business instead of being distributed as dividends.
- Drawings: Withdrawals made by the owner that decrease the equity.
The payment of liabilities, such as an account payable, typically does not affect owner's equity directly. In the specific transaction under discussion, both assets and liabilities decrease. However, since nothing alters the owner's portion of the assets, the owner's equity remains unaffected in this transaction scenario.