This may also be called “Shareholders Equity” or “Owners Equity.” It is always found at the bottom of the Balance Sheet after Liabilities. Assets = Liabilities + Owners Equity.
Equity is simply what’s left over after liabilities have been deducted from assets; what’s left when you subtract what a business owes from what it owns.
This section of the Balance Sheet will show the equity the owner has in the business and where it came from.
Under “Equity” you will see the following parts: Common Stock, Retained Earnings, Current Year Earnings, and Distribution to Shareholder.
Common Stock is the very first money you put in to start the company so long ago. Remember a Balance Sheet shows activity for the business from inception.
You may have another line called “Equity Investments” that shows additional money you put into the company after the original investment.
Retained Earnings – if you add up all the net income that has been generated since inception, then deduct any money the owners have taken out as a distribution, you will get retained earnings. Remember those years there wasn’t any cash for you to take out, but your Income Statement said you made money? It’s here.
Retained Earnings are the accumulated profits or losses from your Income Statement since you started your company. They live in the form of vehicles, cash, receivables, inventory, etc. These are “Retained Earnings” and the Balance Sheet is referring to all retained earnings since you started your business, with the exception of what it earned from the start of the calendar year you are in. That’s the subject of the next line – “Current Year Earnings.”
More tomorrow!
Immensely helpful! Thank you!
The accounting emails have been great. Most is information I basically know. But the refresher course aspect of it is great. It is not often I do not find value in each days email.
Thank you very much