Equity Accounts are the last stop on the Balance Sheet. The total equity in your business represents the net worth of your business, or the “book value”. Everything you own minus everything you owe equals your net worth.
What is YOUR business worth today? Watch the video and then run your balance sheet in your own QuickBooks file and let me know by posting comments below if you now have a better understanding of the net worth or book value of your company.
When your business makes a profit that increases the Equity of your business. If you write yourself a check to pay out those profits (sort of like a dividend on a big corporation) then you reduce the equity in your business because you are paying out the earnings as a benefit to the shareholders. If you purchase equipment or pay for expenses using personal means then you have increased the equity of your business because you made a contribution. The long, clean way to do this is clearer to see when you think about it. You would deposit the cash into your business account first (capital contribution into the business increases equity) and then you would write a check to pay for the equipment. The second part, writing the check to pay for the equipment has no impact on equity – you use some cash in the business and converted that cash to an asset.
Setting up the Equity accounts in your business will vary depending on the entity type.
Here are the equity accounts you would set up for different entity types:
Corps and S-Corps
Common Stock or Capital Stock
LLC / Partnership
Member or Partner Capital (this can be broken up into contributions and distributions just as with shareholder capital in a corp
Member or Partner Earnings
Owner Capital (or break up into owner contributions / distributions)
What questions or challenges do you have in terms of understanding the equity section of your balance sheet? Please post your comments or questions below.