BACKGROUND
1. History
2. GAAP vs. OCBOA
3. Types of Accountants
4. International
5. Future

LIABILITIES  AND  EQUITY

Look at equity from two different angles. From one point of view, equity is what is left over after subtracting liabilities from assets. From another, equity is the result of investment activity and operations.

The last line in the section is Retained Earnings. This is usually seen in corporation balance sheets. It represents the sum total of all profits and losses for the current period and all prior periods. Dividend distributions to shareholders reduce Retained Earnings. Partnerships and Proprietorships fold this amount into the capital accounts (see below).

Corporations also have Treasury Stock. When a corporation buys back its own stock, the debit goes to this account. Treasury Stock reduces equity. Reducing outstanding stock is the same as paying off a loan. If a company buys back a piece of its equity then it has reduced the amount that investors have put into the company. That is why a company’s holdings of its own stock reduces equity rather than increases investments in the asset section.

Withdrawals of money are a key factor in equity accounting. Investors put their money into the company to make a profit on their investment. That means that at some point money has to be taken out of the company. There is a line in the equity section for this. Proprietorships and partnerships call it “draws”. Corporations call it “Dividends”. In all cases, this is a temporary account. At the end of the year a journal entry moves the debit balance elsewhere. Corporations move this to the Retained Earnings account. The other companies move it to the capital accounts.

The capital accounts show equity at the owner level.

For Sole Proprietorships, there is only one capital account. Partnerships have separate capital accounts for each partner. If a partnership has many partners, then it may lump all of them together into one line item for financial statement purposes. A subsidiary ledger keeps track of each partner’s capital account. At the end of the year, all other equity accounts are folded into the proprietor and partner accounts. This includes draws and earnings. The idea is that the balance should be each partner’s ownership position in the company. This is how much a partner can theoretically withdraw.

Investments consist of the amounts originally contributed into the enterprise, any additional amounts put in, and the amounts withdrawn.   The equity section of the balance sheet can tell the user much about the organization of the company.