The interest of the owners in the assets of the entity is termed as equity. In the case of an entity going into liquidation, after paying for all sorts of creditors, shareholders are the persons who get the remaining assets of the company. That is why; it is also called assets minus liabilities or net assets.
In order to start the business, the owner or the shareholders invest a certain amount. This amount is normally termed as equity. However, they may invest further amounts later after the start of the operations. It all depends upon the agreement whether this amount should be classified under equity or as a long-term loan.
Types of Equity Accounts
As we have discussed in the expanded accounting equation, there are several equity accounts. We are including them here for reference:
- Contributed capital – money invested to start the business.
- Withdrawals – money taken out of the business.
- Expenses – these are incurred to earn revenue.
- Revenues – Entity’s main purpose to do the business (in case of profit making organization)
Examples of Equity Accounts
- Owner’s equity
- Common stock
- Paid-in up capital
- Retained earnings
- Dividends
Usually, equity accounts have credit balances. However, drawing accounts and treasury stock are the contra accounts of equity accounts and as a result, these have debit balances.