Equity Definition

The equity of a business is its value in the books that is attributable to its owners. The owners’ interest is the part of assets that is left after all liabilities are paid. Therefore, equity is sometimes called net assets.

For a small company, this mostly represents the book value of the shares, but for larger companies, equity may include more complex types of accounts.

Types of equity accounts

Equity accounts may be divided into the following important types:

  • Contributed Capital: Contributed capital is the part of the capital that directly comes from its owners. In the case of sole-proprietorship and partnerships, it is the initial capital deposit by the owner plus any additional capital deposits during the life of the business. In the case of Corporations, it is the value of Common Stock at par plus additional paid it capital plus any additional stock issuances.
  • Gained Capital: Includes net income by the business less the dividends. If the business is earning more than its dividend payments then gained capital accumulated over the years.
  • Revenues: Revenue is the actual money that a business receives or recognizes for its services or sales during an accounting period before any deductions (discounts, sales returns, cost of goods sold, expenses), etc. are made.
  • Expenses: Expenses actually reduce owners’ equity so expenses are technically contra equity accounts.

Equity accounts examples

Following are the most common equity accounts for single owner businesses and partnerships:

  • Capital: is the simplest equity account and it is used for sole proprietorships and partnerships. It includes both contributed capital and invested capital.
  • Drawings: represents the money drawn by the owner of a small business for their personal use.

Following are some of the equity accounts which are used by corporations:

  • Common Stock: is the basic account used for the equity of corporations. It records the portion of contributed capital that relates to common stock issued at par value.
  • Paid-in Capital Most often the amount that stockholders pay for a company stock is higher than the par value per share. Since the common stock account only records the portion that relates to par value, therefore the extra amount is recorded and Paid-in Capital account.
  • Treasury Stock Treasury Stock records those shares of a company's own common stock that are purchased back for some financial reasons.
  • Dividends: Records the amount of money given to stockholders of a business in the form of income sharing. This has the same function as of Drawings account of small businesses.
  • Retained Earnings: Not all of the earnings of a corporation are distributed among the stockholders. Some are retained from future operations and are recorded in retained earnings account.

by Irfanullah Jan, ACCA and last modified on

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