You may have seen equity accounts on the balance sheet or witnessed a declaration of equity if your accountant produces periodic financial statements for your company. Equity accounts aren’t always intuitive or straightforward to understand. The language used to describe these accounts may be somewhat different. Simply put, they are essential to understand and track because they reflect the assets you have invested in your business.
What are sole proprietors?
You’ll see an “owner’s equity” or “member’s interest” account listed at the bottom of your balance sheet, whether you’re a sole proprietor or a single-member LLC. This is the sum of money or other assets you’ve put into the business. Capital contributions, such as taking money out of your bank account to use for business activities, increase this account’s value. The sum of net income you receive per year also contributes to it. Any annual net losses, as well as any cash you take out of the business for personal use (known as owner’s draws), minimise it.
Partnerships and limited liability corporations (LLCs)
In partnerships and multiple-member LLCs, equity accounts must represent that multiple parties own a business stake. Specific equity accounts are often branded to account for this. A two-person partnership, for example, could list “John Smith, Capital Account” and “Jane Doe, Capital Account.” Contributions and net profits boost equity accounts, while net loss and draws reduce them, just as they do in sole proprietorships. Each person’s equity account will be allocated net income and net loss based on their proportional ownership or the percentages stated in the operating agreement.
What is Equity Accounts?
Both the balance sheet and equity statement (also known as a retained earnings statement, an equity statement, a statement of shareholder’s equity, or a statement of owner’s equity) include equity accounts.
On the balance sheet, the number of equity accounts reflects the dollar amount of equity in the business at a given point in time. The basic accounting formula is assets minus liabilities equal equity, which means the equity part of your balance sheet reflects the company’s assets after any remaining liabilities are deducted. This is also known as the company’s net worth.
The declaration of equity reflects the change of equity during the accounting period. This is where you’ll find accounts like “dividends paid” and “owner draws.” If there is a beginning balance and an ending balance, it is a declaration of equity. An order of equity for a sole proprietor, for example, may look like this:
- Beginning balance of owner’s equity: $50,000
- $10,000 in net profits for the year
- Contributions from the owners: $5,000
- Owners’ draws are worth $2,000 each.
- Ending balance of owner’s equity: $63,000
The owner’s equity rose by $13,000 during the accounting period due to net profits plus donations minus the owner’s draws, as seen in this statement.
How to enter the owner's equity in QuickBooks Desktop software
- Go to the Accounting section.
- Select the Chart of Accounts option.
- To begin, select New.
- Pick Equity from the Account Form drop-down menu.
- In the Detail Type area, choose Owner’s Equity.
- In the Name area, type Owner’s Contribution.
- In the Balance sector, enter the contribution number.
- Close the window after clicking Save.
How to enter the owner's equity in QuickBooks Online
The overall value of a company’s assets that belong to the owner is known as its equity. Equity is determined by subtracting all liabilities from an asset’s total value (Equity = Assets – Liabilities).
You just need to categorise the transaction associated with your deposits if you want to keep track of any new contributions made to the company. If you’ve linked your bank account to QBO, this is possible. If your bank transfers aren’t automatically imported, you should deposit them into your equity account instead. Here’s how to do it:
- Select the + New alternative.
- Choose a bank deposit alternative.
- Pick the bank account you’ll be depositing money into from the Account drop-down menu.
- Fill in the year.
- In the Received from field of the Add funds to this deposit section, type the investor’s name.
- In the Account sector, select the appropriate equity account from the drop-down list.
- Choose a payment option.
- In the Amount sector, enter the investment amount.
- Close the window after selecting Save.
You can repay a capital investment for yourself, partners, or co-owners after you’ve recorded it. A capital disbursement is a term for this procedure.
To summarise, QuickBooks Desktop software allows you to customise many things, which eventually helps you manage the finances or the accounts of the particular organisation you are running or working with. The whole idea of this blog is to help you understand the equity accounts and different aspects to use them for your benefits. I hope that this blog helps you understand the topic and was worth your time.