There are several types of accounts used to record equity. Each one is used to store different information about the interests of owners in a business. The types of equity accounts differ, depending on whether a business is organized as a corporation or a partnership. The equity accounts are as follows:
Types of Equity Accounts for Corporations
- Common stock. This account is used to accumulate the total amount of funds paid to a business for the par value of the shares that it sells to investors.
- Additional paid-in capital. This account accumulates the additional amount that investors pay for shares sold by a corporation above their par value. Since par value is usually quite low, the balance in this account can be much higher than the balance in the common stock account.
- Retained earnings. This account contains the accumulated earnings of the business, minus the amounts of any dividend payments made to shareholders.
- Treasury stock. This account contains the amounts paid to buy back shares from investors. It contains a negative balance.
If a corporation has also issued preferred stock, then there may be additional accounts to separately track this information. For example, there may be a "preferred stock" account and an "additional paid-in capital - preferred stock" account.
The board of directors may also set up an equity reserve account, in which they park funds that are intended for a certain purpose, such as the construction of a fixed asset. There is no organizational or legal basis for such a reserve account; it simply indicates the intent of the board regarding how retained earnings may be used in the future.
Types of Equity Accounts for Partnerships
- Capital. This account contains the amount of funds contributed to a partnership by its partners.
- Drawings. This account contains the cumulative amount of funds withdrawn from a business by its partners for their personal use.