Definition of Equity Section of the Balance Sheet
The equity section of the balance sheet is known as:
- Owner's equity if it is a sole proprietorship. The amount may be reported as a single amount described as owner's capital. On the other hand, it is common for today's accounting software to show three amounts: owner's capital at the start of the year, current year net income, and current year draws by the owner.
- Stockholders' equity if it is a corporation. The reported components may be paid-in capital, retained earnings, treasury stock , and accumulated other comprehensive income.
Examples of Negative Amounts in the Equity Section
If the current year's net income is reported as a separate line in the owner's equity or stockholders' equity sections of the balance sheet , a negative amount of net income must be reported. The negative net income occurs when the current year's revenues are less than the current year's expenses .
If the cumulative earnings minus the cumulative dividends declared result in a negative amount, there will be a negative amount of retained earnings . This negative (or positive) amount of retained earnings is reported as a separate line within stockholders' equity.
The owner's drawing account in a sole proprietorship will have a debit balance. Hence, if it is reported as a separate line, it is reported as a negative amount since the owner's equity section of the balance sheet normally has credit balances.
If a corporation has purchased its own shares of stock the cost is recorded as a debit in the account Treasury Stock. The debit balance will be reported as a negative amount in the stockholders' equity section, since this section normally has credit balances.
Accumulated other comprehensive income can also be a negative (or positive) amount.