Chapter 16. Recording Owners' Equity
What You'll Do
Understand the Opening Balance Equity Account
Record Owners' Draws
Enter Prior Period Adjustments
View Contents of Retained Earnings Account
When describing different types of accounts, the phrase net worth is often applied to the sum of a company's equity accounts. If you add up all the value of the company's assets (items the company owns) and then subtract the company's liabilities (amounts owed to others), you are left with the net worth of the company, or its equity.
Although you can take a shortcut and determine net worth by subtracting liabilities from assets, for a true understanding of net worth you need to examine the actual accounts that make up the equity section of your company's balance sheet.
If your company is a corporation, you have a capital stock account that shows the face value, or par value, of stock shares the company has issued. In addition, you have a paid-in capital account, which is calculated by taking the difference between the amount actually paid for your company's stock and the par value.
Capital accountsincluding retained earnings, owner's capital, and draw accountsrepresent the cumulative net earnings of the company, less any sharing of earnings that has already been paid to owners. Each year the company's capital account is increased by the company's net income and decreased by a variety of items, including dividends or other withdrawals paid to shareholders or owners.
The strangest account, one unique to QuickBooks, is the opening balance equity account. Because QuickBooks is a double-entry bookkeeping programmeaning that for every number you enter, there is an offsetting number of the same amount in another accountand because QuickBooks allows you to enter numbers without identifying where the offsetting number is to be entered, the opening balance equity account exists. This account provides a temporary resting place for entries you make that have only one side. In this chapter, you'll learn how to understand the numbers in the opening balance equity account and how these amounts should be handled when you prepare your financial statements.