The Company's Equity

Equity is the owners' capital. Equity is always equal to the difference between the company's assets and liabilities. There are different forms of equity, depending on both the organisational form of the company and how the equity was raised.

For instance in a stock company, the company's shares are equity as well as any funds that have been raised because of earnings the company has made over time. When a company pays dividends on its shares, the dividend reduces the company's equity, because some of the equity has been paid to the shareholders in the form of dividends. There are strict regulations on how equity can be treated in a company.

In a sole proprietorship, the owner's capital is equivalent to the equity. A sole proprietorship's equity increases as the business earns money, if that money is not spent by the owner on private spending.

A partnership is very similar to a sole proprietorship. The main difference is that the sole proprietorship is owned by one person, whereas a partnership is owned by two or more persons.

Working With Equity

For Companies

There are no automatic routines for performing equity adjustments. When you have ended your financial year, you need to transfer the year's profits to equity (retained earnings) for the next financial year. You should consult your accountant on how to post such an entry. This needs to be posted as a journal entry.

For Sole Proprietorships and Partnerships

When owners withdraw capital from the business (i.e. for private spending) such transactions are recorded in Financials » New Transactions » P29 Capital Withdrawal.

When owners increase the capital in the business (i.e make more private funds available to the business) such transactions are recorded in Financials » New Transactions » P28 Capital Increase.