Accounting for Equity Journal Entries

by Kathy Adams McIntosh; Updated September 26, 2017

All businesses are involved in equity transactions. Corporations conduct equity transactions through the sale of stock and the payment of dividends. Sole proprietorships perform equity transactions through investments and withdrawals. The accountant also records the net income at the end of the period and adjusts the owner’s equity accordingly.

Sale of Common Stock

Corporations sell common stock to investors to raise funds and distribute ownership of the company. Common stock transactions form the basis of the owner’s equity in a corporation. The company assigns a par value to each share of common stock. This number is arbitrary, and the corporation uses it simply for recordkeeping. Some companies use a stated value in place of the par value. Investors usually pay more for each share of stock than the specified par value. The additional amount is recorded as Paid In Capital. When the accountant records the journal entry for the sale of common stock, she records a debit to Cash for the amount received, a credit to Common Stock for the total par value of the stock sold and a credit to Paid In Capital for the difference between the selling price and the par value.

Dividend Payment

Dividend payments represent a return of equity to the stockholders of a corporation. Boards of directors declare the decision to issue a dividend. When the declaration is made, the accountant records a debit to Cash Dividends and a credit to Dividends Payable. When the company pays out the dividend, the accountant records a debit to Dividends Payable and a credit to Cash.

Owner’s Investment/Withdrawal

Sole proprietorships also record equity transactions in their financial records. Sole proprietorships do not issue stock, so all the money invested becomes part of the owner’s capital. When the owner makes an investment in the business, the accountant records a debit to Cash and a credit to Owner’s Capital. If the owner withdraws money from the business, the accountant records a debit to Owner’s Drawing and a credit to Cash.

Closing Entries Corporation

All businesses incur either a net income or a net loss at the end of the month. The net income or net loss is transferred to the equity accounts through the closing entries. Closing entries are prepared after the financial statements have been completed. Through the closing entries, the company’s net income or net loss balance land in the income summary account. If the income summary account has a debit balance, the accountant records a debit to Retained Earnings and a credit to Income Summary. If the income summary account has a credit balance, the accountant records a debit to Income Summary and a credit to Retained Earnings. The final closing entry closes out the cash dividends account. The accountant records a debit to Retained Earnings and a credit to Cash Dividends.

Closing Entries Sole Proprietorship

Sole proprietorships also use the income summary account to record net income or net loss. If the income summary account has a debit balance, the accountant records a debit to Owner’s Capital and a credit to Income Summary. If the income summary account has a credit balance, the accountant records a debit to Income Summary and a credit to Owner’s Capital. The final closing entry closes out the owner’s drawing account. The accountant records a debit to Owner’s Capital and a credit to Owner’s Drawing.

Photo Credits

  • Hemera Technologies/PhotoObjects.net/Getty Images