Equity is the networth of a business. So there shouldn't be any transactions directly effecting the equity account or should they ? Also there should only be one equity account for a business. In what cases can a company have multiple equity accounts ? What subaccounts could an equity account have ? examples would be very nice.
thx
If you're expecting us to do your homework, forget it!
Make use of the resources provided by your instructor. That way you'll get an education you won't forget.
Rusty
Its not homework and I dont have an instructor. I'm a programmer who wants to understand Accounting principles to be able to write accounting software.
It's not *exactly* networth so much as "net assets" (which is another term you may see interchanged for "equity"). Equity accounts are generally a combination of Stock of some kind (Common Stock, Preferred Stock), Additional Paid-In Capital (which is just the amount someone pays for stock, above and beyond its stated, par value... like if you pay $25 for a $1-par stock, the Common Stock account goes up by $1, and APIC goes up $24), and Retained Earnings.
For the most part the Stock accounts (or they are called Capital accounts, for non-corporations, like partnerships) don't change over the course of the year. You put the money in when purchasing equity, and it stays there. Retained earnings is the equity portion which changes. Generally, it goes UP with Net Income, DOWN with Net Losses (negative Net Income) and DOWN with dividend payouts.
For example, say your net income for the year was $100. You *just* started the company, so your beginning Retained Earnings was zero. Let's say this $100 at the end of the year was all in cash. You have $100 in Cash, and $100 in Retained earnings, at 12/31/06. Let's say the next year, your Net Income was $1000, and again, it's all cash in your bank. Your retained earnings for '07 increased by the Net Income, of $1000, so:
Assets = 1100 Cash (100 in Cash 2006 + 1000 in cash 2007) Equity = 1100 Retained Earnings(100 Retained earnings at end of 2006 +
1000 increase in 2007, by way of Net Income)Say then, that you decide to let others in on your business, and Mr. Smith purchases 100 of your $1-par stock for $25. That's $2500 more in cash from the sale of stock. Let's say you also made $10,000 in Net Income that year, and it's all sitting in your bank account.
Assets = $13,600 Cash Equity = $100 Common Stock + $2400 APIC + 11,100 Retained Earnings (1100 to start plus 10000 Net Income this year) = 13,600
These are general guidelines. There are, of course, exceptions... and that's why we take 30+ hours of classes in college -- to learn about the exceptions :D
-Holly
Holly is absolutely right, the equity section of the balance section can be rather complicated. The important thing is making it possible to close net income to retained earnings at the end of the period in which you are reporting for.
That being said, it is also necessary to make it possible to write journal entries to retained earnings and other equity accounts for those strange occurrences such as contributed surplus, comprehensive income (coming into standards in Canada as of October 1 or earlier) and cumulative translation adjustment, non-controlling interest for example.
I think the key would be to enable the program to add in as many equity accounts as the user would like. This would be useful in cases where there are different share capital accounts or to deal with those strange situations when other accounts are needed.
What kind of a program are you trying to write?
Is this sufficient information?
Anita
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