Equity Account Type

An Equity account will typically have a credit balance at the end of each month. In simple terms, an Equity account is the amount owed to the owner (or shareholders) if the company were to sell all of its assets and pay off all of its liabilities. Of course, a company would never sell all its assets and pay off all its liabilities unless it was closing for good, so this example is only hypothetical.

Examples of equity accounts are:

• The amount originally paid in to the company when shares of stock were sold are recorded as Common Stock.
• The accumulation of all the profits and losses of the company since it was formed (accumulated profits will have a credit balance, accumulated losses will have a debit balance) are recorded in the Retained Earnings account.

NOTE: The reason it is important to classify an account as an Equity account for RecWizard purposes is that the “normal balance” will always be a credit.