Are Equity Accounts a Credit Balance Account?

Accountants classify equity accounts as those that determine the net worth of the business. All companies include equity accounts, whether the business owner organizes as a sole proprietorship, a partnership or a corporation. Most equity accounts are reported with a normal credit balance, but some exceptions exist.

Owner’s Capital

The owner’s capital account exists in a sole proprietorship or a partnership. These accounts represent the portion of the company’s net worth attributable to each owner. Entries to this account typically include recording investments from the owners and the transfer of net income at the end of each accounting period. The balance in each owner’s drawing account is also transferred to this account at the end of each accounting period. This account increases with a credit entry, decreases with a debit entry and maintains a normal credit balance.

Owner’s Drawing

The owner’s drawing account exists in a sole proprietorship or a partnership. These accounts represent the dollars taken out of the business by each owner. Entries to this account typically include recording withdrawals by the owners. The balance in each owner’s drawing account is transferred to the owner’s capital account at the end of each accounting period. This account increases with a debit entry, decreases with a credit entry and maintains a normal debit balance.

Capital Stock

The capital stock account exists in a corporation. Capital stock represents investments made to the company by individual stockholders. Capital stock consists of common stock and preferred stock. Entries to this account typically include recording new sales of company stock. This account increases with a credit entry, decreases with a debit entry and maintains a normal credit balance.

Retained Earnings

The retained earnings account exists in a corporation. This account represents the earnings each year that are kept within the company for future activities. Entries to this account typically include recording the transfer of net income at the end of each accounting period and the declaration of dividends to be paid out to stockholders. This account increases with a credit entry, decreases with a debit entry and maintains a normal credit balance.

Paid In Capital

The paid in capital account exists in a corporation. Paid in capital represents the money received from the sale of stock which is in excess of the stock’s par value. Paid in capital applies to both common stock and preferred stock. Entries to this account typically include recording the excess paid on new sales of company stock. This account increases with a credit entry, decreases with a debit entry and maintains a normal credit balance.

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