The third section of a company's balance sheet is "Equity." Equity takes the total from the "Assets" section, deducts the "Liabilities" and attributes the difference to the company's owners. A business owned by one person -- called a sole proprietorship -- has a simple Equity section of one line, while a corporation's balance sheet features many more line items under "Stockholders' Equity."
Equity is the value of ownership. Any company has both assets and liabilities, which owners use to operate a business with the goal of creating more value through use. Owners also invest their own capital into the business. All of this extra value -- or excess debt, if business goes badly -- can be attributed to the owner's or owners' actions and is therefore placed in the "Equity" section of the balance sheet.
A business owned by one person has a very simple "Equity" section consisting of one account entitled "Capital." Any initial investment on the part of the owner -- several thousand dollars in startup cash from a personal savings account, for example -- appears in the "Capital" account. When the business generates a profit, the extra money appears in the "Capital" account. Likewise, the owner can withdraw money from the "Capital" account for her own expenses or to pay business expenses.
The owners of corporations are stockholders -- also called shareholders. The "Equity" sections of corporate balance sheets reflect the ownership arrangement by titling the section "Shareholder Equity" or "Stockholder Equity." Corporate owners become owners through acquiring shares of corporate stock and corporate equity reflects this more complicated arrangement by including an accounting of stock as well as capital.
Stockholders' Equity Entries
"Stockholders' Equity" features many entries that simply do not exist, or have relevance for, a sole proprietorship. A corporate-equity section begins with the total number of preferred shares before listing the total number of common shares, along with the shares' value at par value. The section then reports the value of any shares sold recently as "Paid-In Capital" before listing any profits that the company put back into business operations as "Reinvested Earnings." If the company has extra capital that did not go out to stockholders as dividends or get reinvested, it may appear in a capital account called "Surplus Capital." Depending on the company's finances and the state in which it operates, it may list more or fewer entries in its "Equity" section.
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