Is it okay to have negative amounts in the equity section of the balance sheet?

Definition of Equity Section of the Balance Sheet

The equity section of the balance sheet is known as:

  • Owner's equity if it is a sole proprietorship. The amount may be reported as a single amount described as owner's capital. On the other hand, it is common for today's accounting software to show three amounts: owner's capital at the start of the year, current year net income, and current year draws by the owner.
  • Stockholders' equity if it is a corporation. The reported components may be paid-in capital, retained earnings, treasury stock, and accumulated other comprehensive income.

Examples of Negative Amounts in the Equity Section

If the current year's net income is reported as a separate line in the owner's equity or stockholders' equity sections of the balance sheet, a negative amount of net income must be reported. The negative net income occurs when the current year's revenues are less than the current year's expenses.

If the cumulative earnings minus the cumulative dividends declared result in a negative amount, there will be a negative amount of retained earnings. This negative (or positive) amount of retained earnings is reported as a separate line within stockholders' equity.

The owner's drawing account in a sole proprietorship will have a debit balance. Hence, if it is reported as a separate line, it is reported as a negative amount since the owner's equity section of the balance sheet normally has credit balances.

If a corporation has purchased its own shares of stock the cost is recorded as a debit in the account Treasury Stock. The debit balance will be reported as a negative amount in the stockholders' equity section, since this section normally has credit balances.

Accumulated other comprehensive income can also be a negative (or positive) amount.

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