Audience: 

This is the third of a series of training posts and videos presenting accounting in simple-to-understand English for Small Businesses and Small Government Contractors.

The goal of RMOHC is to provide client empowerment and financial peace of mind through complete, compliant, and accurate accounting.

This third post deals with Equity, the third of 5 account types.

The 5 account types are: 

Assets
Liabilities
Equity
Income
Expenses

What is Equity?

In large corporations, Equity, or ownership, is reflected in Stock.

In Small Businesses, and Government Contractors, the ownership is reflected in Equity accounts (~ownership accounts).  This shows how much the owner(s) has invested in the company (contributed) and taken out of the company (drawn or withdrawn).

Equity, or Owner’s Equity, is ultimately the worth of the Small Business, or Government Contracting Company. It is what the owner has in Assets with the Liabilities removed. 

The formula for this is simple:    Assets – Liabilities = Owner’s Equity

If the company is a partnership, then the Equity account is called Partner Equity. Each partner would have a separate Partner Equity Account. So if Mary and John were the partners, the accounts would be:
–Partner Equity: Mary
–Partner Equity: John

Examples of assets you will recongnize are:

Examples of Equity you will recongnize are:

Owner’s Equity – what the owner has invested and taken out of the corporation

This can be divided into two accounts if the owner wants more detail:
-Owner’s Contribution – what amounts the owner has invested in the corporation
-Owner’s Draws – what amounts the owner has withdrawn from the corporation

If the owner is not set up to be paid by a regular payroll account, then the owner is paid using the Owner’s Withdrawals account.

Retained Earnings (a.k.a. Current Year Earnings) – this is the amount of money the company has earned (or lost) during the current year. This amount is found at the bottom line of the Income Statement.*  

At the end of each year, the amount in the Retained Earnings account is moved into Owner’s Equity so it can reflect earnings of the new year. 

-If the Retained Earnings shows a profit, the account is moved into Owner’s Contributions
-If the Retained Earnings shows a loss, the account is moved into Owner’s Draws

*Income Statements will be presented in a separate presentation.

Remember:

Equity is your ownership in the company whether you are a single owner entrepreneur or partnered with another person. Equity Accounts include:

–Owner’s Equity (Owner’s Contribution & Owner’s Draw) or

-Partner’s Equity (Partner’s Contribution & Partner’s Draw)

Retained Earnings (the bottom line from the Income Statement)

Thank you for reading this post, watch for video series that will be coming out very soon. 

If this was helpful, please share this with your friends and colleagues. 

Here’s to your peace of mind!!
  -Michael

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