Naming Your Investments — Equity
Every business has investors. Even a small mom and pop grocery store requires money upfront to get the business on its feet. Investments are reflected on the balance sheet as equity. The line items that appear in a balance sheet’s Equity section vary depending upon whether or not the company is incorporated. (Companies incorporate primarily to minimize their personal legal liabilities.)
If you’re preparing the books for a company that isn’t incorporated, the Equity section of your balance sheet should contain these accounts:
Capital: All money invested by the owners to start up the company as well as any additional contributions made after the start-up phase. If the company has more than one owner, the balance sheet usually has a Capital account for each owner so that their individual stakes in the company can be tracked.
Drawing: All money taken out of the company by the company’s owners. Balance sheets usually have a Drawing account for each owner in order to track individual withdrawal amounts.
Retained Earnings: All profits that have been reinvested into the company.
For a company that’s incorporated, the Equity section of the balance sheet should contain the following accounts:
Stock: Portions of ownership in the company, purchased as investments by company owners.
Retained Earnings: All profits that have been reinvested in the company.
Because the fictional company isn’t an incorporated company, the accounts appearing in the Equity Section of its balance sheet are