Recording equities is a necessary part of keeping track of the financial progress of the business. The equities account is part of the general ledger. Equities accounts reflect the net worth of the company.
If the business is a corporation, equities can be seen as the value of things owned by shareholders. It also includes retained earnings which is the accumulated profit since the business began. Transactions that involve equity accounts are neither income nor expenses; these transactions don’t affect the taxable profit/loss of the company.
Equity is increased by the money the owners put into the business and by the company’s profit. Equity is decreased by business losses and by withdrawals (not including payroll) made by business owners. For income tax purposes, owners are taxed on the profit and loss of the business, not the amount of funds they withdraw.
These accounts appear after the liability section on the balance sheet. A computerized program will number these accounts in the range of 3000-3999.
Key Equity Accounts
Common Stock (3100)
Retained Earnings (3200)
Record any money that the owner takes out of the business. Again, if the business has partners, each partner should have his/her own name drawing account. If the business is a proprietorship, charitable contributions, health insurance premiums, retirement plan contributions, and taxes may be paid from this account. It is recommended to set up specific Draw accounts for each of these. This will make it easier during tax time to differentiate between payments that are tax deductible and those that are not on the business’ Schedule C.