Types of equity accounts
/What are Equity Accounts?
Equity accounts are used to store the invested and retained funds in a business. Several accounts are used for this purpose, since there several types of equity that need to be recorded. The types of equity accounts differ, depending on whether a business is organized as a corporation or a partnership. The equity accounts are noted below.
Types of Equity Accounts for Corporations
The accounts associated with equity within a corporation are noted below. A debit balance in one of these accounts represents a negative equity amount, while a credit balance represents a positive equity amount. The account types are as follows:
Common stock account. The common stock account is used to accumulate the total amount of funds paid to a business for the par value of the shares that it sells to investors. Common stock is the most common type of equity issued by a corporation.
Additional paid-in capital account. The additional paid-in capital account accumulates the additional amount that investors pay for shares sold by a corporation above their par value. Since par value is usually quite low, the balance in this account can be much higher than the balance in the common stock account. When there is no par value associated with stock, there is no additional paid-in capital account.
Retained earnings account. The retained earnings account contains the accumulated earnings of the business, minus the amounts of any dividend payments made to shareholders. This can be a negative balance, if a business has persistently been generating losses.
Treasury stock account. The treasury stock account contains the amounts paid to buy back shares from investors. It contains a negative balance, so it offsets the amounts in the other accounts.
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Additional Equity Accounts
If a corporation has also issued preferred stock, then there may be additional accounts to separately track this information. For example, there may be a "preferred stock" account and an "additional paid-in capital - preferred stock" account. These shares are usually paid a dividend, which may be cumulative.
The board of directors may also set up an equity reserve account, in which they park funds that are intended for a certain purpose, such as the construction of a fixed asset. There is no organizational or legal basis for such a reserve account; it simply indicates the intent of the board regarding how retained earnings may be used in the future.
Types of Equity Accounts for Partnerships
The accounts associated with equity in a partnership are noted below. A debit balance in one of these accounts represents a negative equity amount, while a credit balance represents a positive equity amount. The accounts are as follows:
Capital account. The capital account contains the amount of funds contributed to a partnership by its partners.
Drawing account. The drawing account contains the cumulative amount of funds withdrawn from a business by its partners for their personal use.
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