Balance Sheet

Owner's Equity—along with liabilities—can be thought of as a source of the company's assets. Owner's equity is sometimes referred to as the book value of the company, because owner's equity is equal to the reported asset amounts minus the reported liability amounts.

Owner's equity may also be referred to as the residual of assets minus liabilities. These references make sense if you think of the basic accounting equation:

Assets   =   Liabilities   +   Owner's Equity

and just rearrange the terms:

Owner's Equity   =   Assets   –   Liabilities

"Owner's Equity" are the words used on the balance sheet when the company is a sole proprietorship. If the company is a corporation, the words Stockholders' Equity are used instead of Owner's Equity. An example of an owner's equity account is Mary Smith, Capital (where Mary Smith is the owner of the sole proprietorship). Examples of stockholders' equity accounts include:

• Common Stock
• Preferred Stock
• Paid-in Capital in Excess of Par Value
• Paid-in Capital from Treasury Stock
• Retained Earnings
• Etc.

Both owner's equity and stockholders' equity accounts will normally have credit balances.

Contra owner's equity accounts are a category of owner equity accounts with debit balances. (A debit balance in an owner's equity account is contrary—or contra—to an owner's equity account's usual credit balance.) An example of a contra owner's equity account is Mary Smith, Drawing (where Mary Smith is the owner of the sole proprietorship). An example of a contra stockholders' equity account is Treasury Stock.

Classifications of Owner's Equity On The Balance Sheet
Owner's equity is generally represented on the balance sheet with two or three accounts (e.g., Mary Smith, Capital; Mary Smith, Drawing; and perhaps Current Year's Net Income). See the sample balance sheet in Part 4.

The stockholders' equity section of a corporation's balance sheet is:

• Paid-in Capital
• Retained Earnings
• Treasury Stock

The stockholders' equity section of a corporation's balance sheet is:

STOCKHOLDERS' EQUITY Paid-in Capital Preferred Stock Common Stock Paid-in Capital in Excess of Par Value - Preferred Stock Paid-in Capital in Excess of Par Value - Common Stock Paid-in Capital from Treasury Stock Retained Earnings Less: Treasury Stock      TOTAL STOCKHOLDERS' EQUITY

Owner's Equity vs. Company's Market Value
Since the asset amounts report the cost of the assets at the time of the transaction—or less—they do not reflect current fair market values. (For example, computers which had a cost of $100,000 two years ago may now have a book value of $60,000. However, the current value of the computers might be just $35,000. An office building purchased by the company 15 years ago at a cost of $400,000 may now have a book value of $200,000. However, the current value of the building might be $900,000.) Since the assets are not reported on the balance sheet at their current fair market value, owner's equity appearing on the balance sheet is not an indication of the fair market value of the company.

Owner's Equity and Temporary Accounts
Revenues, gains, expenses, and losses are income statement accounts. Revenues and gains cause owner's equity to increase. Expenses and losses cause owner's equity to decrease. If a company performs a service and increases its assets, owner's equity will increase when the Service Revenues account is closed to owner's equity at the end of the accounting year.

  Part 1    Part 2    Part 3    Part 4