Chapter 4
Explaining Equity
IN THIS CHAPTER
Meeting the three types of business entities and two types of stock ownership
Investigating paid-in capital and retained earnings
Checking out reductions in stockholder’s equity
Understanding how corporations pay their investors
Equity (also referred to as net assets) is the combined total of each owner’s investment in the business. Both terms refer to the difference between assets (resources a company owns) and liabilities (claims against the company).
In this chapter we discuss some of the details regarding the amount of value in a company that belongs to the shareholders. This part is exciting for many investors because this is the hindsight assessment of how much their investments are actually worth to them in book value.
Understanding How Owner Equity Varies among Business Entities
Depending on the type of business entity, the owners’ equity section of the balance sheet can range from bare-boned to quite elaborate, as explained in the following sections.
Sole proprietorship
Sole proprietorships (one-owner businesses) have an equity ...
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