What is Equity in Accounting and Finance?


In Accounting and Finance, Equity represents the value of the shareholders’ or business owner’s stake in the business. Equity accounts have a normal credit balance. Equity increases on the credit side and decreases on the debit side. Equity is listed on the Balance Sheet. Changes to Equity are calculated on the Statement of Owner’s Equity or Statement of Shareholders’ Equity or Statement of Retained Earnings. Examples of Equity accounts are Owner’s Equity, Stockholders’ Equity, Shareholders’ Equity, and Common Stock.

Equity Flashcard

What are Some Examples of Equity Accounts?

This table shows a list of common liabilities businesses use to track the amounts owed by the business.

Common StockRetained Earnings
Preferred StockAdditional Paid in Capital
Owner’s Name, Equity or CapitalPartner’s Name, Equity or Capital
Member’s Name, Equity or CapitalUnrealized Gains
Owner’s Name, DistributionOwner’s Name, Withdrawals or Drawing
DividendsMember’s Name, Distribution
Treasury StockUnrealized Losses
A list of common equity accounts used by a business to track increases and decreases to owners or stockholders equity accounts.

What Accounts are Used to Record Increases in Equity?

The following Equity accounts are used to track increases in Equity:

Common StockRetained Earnings
Preferred StockAdditional Paid in Capital
Owner’s Name, Equity or CapitalPartner’s Name, Equity or Capital
Member’s Name, Equity or CapitalUnrealized Gains
A list of common equity accounts used by a business to track increases to owners or stockholders equity accounts.

What Accounts are Used to Record Decreases in Equity?

The following accounts are used to track decreases in owner’s or shareholder’s equity.

Owner’s Name, DistributionOwner’s Name, Withdrawals or Drawing
DividendsMember’s Name, Distribution
Treasury StockUnrealized Losses
A list of common equity accounts used by a business to track decreases to owners or stockholders equity accounts.

What is the Difference Between Equity and Capital?

Capital is a subcategory of equity. Capital represents an owner’s investment of assets into the business. For example, when the business started the owner contributed cash and equipment to start the business.

Equity represents the difference between Assets and Liabilities. If a business sells all of its assets and pays off all its debts (liabilities), the amount remaining is the owner’s share (equity) of the business.

A business owner’s capital increases when they invest more money or other assets into the company. A business owner’s equity increases when there are profits in the business.

Total equity includes Capital + Retained Earnings – Dividends (Withdrawals)

What is Retained Earnings?

Retained Earnings represents the cumulative profits and losses in a business net of Dividends. As a business has profits and losses over years, Retained Earnings increases or decreases as in this example:

202220232024
Net Income10,00015,000-1,000
Dividends-100-2000
Current Year Earnings9,90014,800-1,000
Retained Earnings9,90024,70023,700
Chart showing the accumulation of Retained Earnings.

How is Equity Listed on the Balance Sheet?

On the Balance Sheet, equity is broken down by type of equity, including owner’s original investment, retained earnings, common stock, preferred stock, dividends, and treasury stock. Changes in equity are tracked on the Statement of Owner’s Equity or Statement of Shareholders’ Equity or Statement of Retained Earnings. Those amounts are then summarized on the Balance Sheet in the Equity section.

Here is an example of the equity section of the Balance Sheet from Apple:

Equity section from an Apple Balance Sheet

What is the Statement of Owner’s Equity? What is the Statement of Shareholder’s Equity? What is the Statement of Retained Earnings?

For a more in depth understanding of the Statement of Owner’s Equity, watch this video:

Video explaining Statement of Owner’s Equity.

Chart of Accounts Listing of Typical Equity Accounts

Listing of Equity accounts, normal balances, and associated financial statements.
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Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 11 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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