UNDERSTANDING ACCOUNTING TALK 16: Growth in Equity
In addition to Stockholders’ Equity (for corporations & incorporated small businesses), the other item listed under Equity is Retained Earnings where the Net Income (i.e. Revenues or Income minus Expenses) is accumulated.
Equity is increased through the issue of new shares of stock (which are paid for either by existing stockholders or by new subscribers). Equity is also increased by additions to Retained Earnings through the Net Incomes earned by the corporation in each accounting period.
In the case of Owners’ Capital (for sole proprietorships) or Partners’ Capital (for partnerships), Equity also grows through Net Incomes. However, these earnings are usually not reflected in a separate account but are added directly to Capital.
The Owner or Partners may draw cash from the business from time to time. These are reflected in a temporary account, Drawings. These Drawings must be controlled so that the business is not impaired. Otherwise, the business will be forced to incur Liabilities to meet its expenses or acquire merchandise for sale or purchase supplies or engage services needed by the business. The business will then be on its way to financial problems.
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POSTED IN: Accounting for NonAccountants, Drawings, Equity / Capital
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