Stockholders’ equity represents the claim shareholders of the corporation have to the company’s net assets. Stockholders’ equity has three common components: paid-in capital, treasury stock, and retained earnings. Paid-in capital and treasury stock involve transactions dealing with the corporate stock issuances. Retained earnings shows income and dividend transactions.
Equity shows the combined total of each and every owner’s investment in the business. A company can organize itself as one of three types of entities: sole proprietorship, corporation, or flow-through entity such as a partnership. Your intermediate accounting textbook hones in on the corporation equity accounts.
The sole proprietorship has two unique equity accounts: owner’s capital and owner withdrawals. The owner’s capital accounts show cash and other contributions, such as equipment the owner makes to the business. Owner withdrawals shows money and other assets the owner takes from the business to convert to personal use.
Partnerships mimic sole proprietorships, in that the equity section has capital and withdrawal accounts. Instead of owner capital and owner withdrawals, though, it’s partner capital and withdrawals.
Another term for equity is net assets, which is the difference between assets, or the resources a company owns, and liabilities, which are claims against the company.
