An equity account is a type of account that normally reflects a positive, or credit, balance. When taken as a group, equity accounts show the amount of assets remaining in a business or personal account after the liabilities, or debits, are subtracted. Different types of equity accounts are used for different situations, so the accounts in a business that is operated as a sole proprietorship will not be the same as those used in a large, publicly traded corporation.
The revenue equity account is an account used to track all of the income for a business. This is the money earned by the business through selling its products or its services. For an individual, revenue would be any wages earned and would also include such things as interest income or income resulting from stock dividends, the sale of assets or anything else that results in an increase in the amount of cash the person has.
If a business owner invests additional money into the business, it is reflected in this equity account. Assets added to the business, such as materials or buildings, will also show as owner's investments. Any increase in the amount of money invested in the company increases the overall value of the business, creating additional equity for the owner or stockholders.
Common stock is the type of stock typically issued by companies and the stock certificate shows how much of a company a stockholder owns. The stock is reported in an equity account, because it represents money that has been invested in the company. Stockholders may receive dividends -- cash payments -- based on their stock holdings, and if the company is sold they may receive money for their stock.
When a company earns money through normal business transactions, some of that money is used to pay wages, buy materials and pay rent or to cover other business expenses. Money that is not spent or paid out as dividends is put back into the business, which increases the overall value of the business. In companies with shareholders, this equity account reflects the net income of the company minus any dividends that have been paid out.
Preferred stock is another type of company equity that is similar to common stock, but the dividends are paid differently. As a rule, preferred stockholders are paid their dividends before the common stockholders, but the preferred stockholders only get a fixed amount each time. This benefits the company because these shareholders do not get increased dividends if the company's income increases, leaving more revenue for the company.
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