What Are the Elements That Must Be Included in the Equity Section of a Balance Sheet?
Original post by David Ingram of Demand Media
The owners' equity section of a company's balance sheet displays the balances of owners' equity accounts at a given point in time. Owners' equity sections can be divided into two main sub-divisions: paid-in capital and retained earnings. Equity sections differ slightly between private companies, limited liability companies (LLCs) and corporations. The elements to include in this final balance-sheet section depend on the way you have organized your business.
Corporations list four balance-sheet items to represent the value of outstanding shares. First, corporations list the par value of all common and preferred shares in two separate listings. Par value represents the original value printed on stock certificates, which is often $1. Corporations list paid-in capital in excess of par value for both common and preferred shares in two separate records. These accounts represent the actual amounts of money received from selling stocks. With $1 par-value stock, the par value accounts can provide insight into the number of shares outstanding, and the paid-in capital-in-excess accounts can be used to show the actual contribution amounts of each shareholder.
Retained earnings is another corporate account that sole proprietorships, partnerships and LLCs do not have to list in their equity sections. Corporations can do one of three things with their profit: re-invest it in the business, distribute it shareholders through dividends, or hold the money for future use. Money held for future use in deposit accounts is considered retained earnings. A high retained earnings value may seem like a good thing at first glance, but it can also be a sign of financial mismanagement. Every dollar kept in retained earnings and listed in the equity section could be generating income if it were invested in the assets section, even if it is only held in conservative bonds or CDs.
The owner's capital account works much the same way as retained earnings, but owner's capital represents the profit available for sole-proprietorship or partnership owners to withdraw at their leisure. Corporations have a fiduciary duty to maximize income for shareholders, which is why retained earnings can be unproductive. Sole proprietorships and partnerships have no such duties, and company owners can decide to keep as much cash in deposit accounts as they want, withdrawing amounts for personal use at any time.
Contributions and Withdrawals
Contributions and withdrawals represents the amount of cash put into and taken out of an LLC by its members. Contributions can be compared to the company stock accounts in corporations -– contributions represent the monetary value of assets put into the company by LLC members. LLC members cannot receive a regular paycheck like corporate executives or sole proprietors. Instead, LLC members rely on drawing accounts that allow them to dip into company profits for personal use, thus requiring an account to keep track of member draws.
- Nerd's Blog; Understanding the Balance Sheet -- Equity Accounts; August 2011
- Accounting Coach; Balance Sheet; Harold Averkamp
About the Author
David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.
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