Is it normal for Equity Account to be negative if my investment is less than my draws?

Alexiers

I'm pretty new to accounting but I'm loving Wave so far. However I would like to ask, is it normal for the Equity Account to be in a negative value if my investment is less than my draws?

I run a consulting business and the cost to run it is minimal. Let's say my initial investment to my sole proprietorship is 100 which I categorize as Owner's Investment/Draws. After I receive my first client payment, which is 3,000, I would like to pay myself 2,000. So I transferred that amount to my personal banking account and record the expense as Owner's Investment/Draws (because that's what everyone told me to do).

But now my equity account is -1,900. Is this normal?

Alexia

Hi, @Alexiers.

This is due to how equity accounts interact with amounts being debited or credited to them. The simplest way to explain it is to say that they work like credit cards (they don't quite work like that, but they do act the same as liability accounts).

That means that the amount that appears as your "Balance" represents how much your business has been given by that account. If this was a credit card, it would represent what you owe. So in this case, your balance is of $-1,900 because that's how much your business has received from this account. Does this all make sense?

If you want a better understanding of how each type of account interacts with debits and credit, or just sharpen those accounting skills, check out our own guide to using Wave: Fearless Accounting. There's a sub-chapter starting at page 78 that goes into details about this exact subject.

In short, you're doing everything right, accounting can just look a little strange on occasion