Equity is used in accounting in several ways. Often the word equity is used when referring to an ownership interest in a business. Examples include stockholders' equity or owner's equity.
Occasionally, equity is used to mean the combination of liabilities and owner's equity. For example, some restate the basic accounting equation Assets = Liabilities + Owner's Equity to become Assets = Equities.
Equity is also used to indicate an owner's interest in a personal asset. The owner of a $200,000 house that has an $80,000 mortgage loan is said to have $120,000 of equity in the house.
Outside of accounting, the word equity is also used to indicate fairness or justice.
A company's payment of each month's rent is recorded with a credit to Cash and a debitto Rent Expense. The credit to Cash causes a reduction in the company's assets. The debit to Rent Expense causes owner's equity (or stockholders' equity) to decrease.
The reason the debit causes owner's equity to decrease is that expenses are temporary accounts that will be closed to the owner's capital account (or to a corporation's retained earnings account within stockholders' equity).
In accounting, dr. is the abbreviation for the word debit. (Today, accountants and bookkeepers use the term debit, but five centuries ago in Italy, the term included the letter "r".)
In accounting and bookkeeping, debit or dr. indicates an entry on the left side of a general ledger account. Typically, the accounts for assets and expenses will have debit balances. Debit entries will also reduce the credit balances typically found in the liabilityand stockholders' equity accounts.
A main difference is the section that presents the difference between the total assets and total liabilities. The nonprofit's statement of financial position refers to this section as net assets, whereas the for-profit business will refer to this section as owner's equity or stockholders' equity. The reason is the nonprofit does not have owners. This means that the nonprofit organization's statement of financial position will reflect this equation: assets – liabilities = net assets.
The net assets section will consist of the following parts: net assets without donor restrictions and net assets with donor restrictions. The amounts reported in each of these parts are obviously based on the donor's stipulations.
The only journal entry needed for a stock split is a memo entry to note that the number of shares has changed and that the par value per share has changed (if the stock has a par value). However, a typical journal entry with debits and credits is not needed since the total dollar amounts for the par value and other components of paid-in capital and stockholders' equity do not change.
For example, if a corporation has 100,000 shares of $1.00 par value stock and it declares a 2-for-1 stock split, the corporation will have 200,000 shares with a par value of $0.50 per share. Before and after the stock split, the total par value is $100,000. Other account balances within stockholders' equity also remain the same.
Under the cost method of recording treasury stock, the cost of treasury stock is reported at the end of the Stockholders' Equity section of the balance sheet. Treasury stock will be a deduction from the amounts in Stockholders' Equity.
Treasury stock is the result of a corporation repurchasing its own stock and holding those shares instead of retiring them.
In the general ledger there will be an account Treasury Stock with a debit balance. (At the time of the purchase of treasury stock, the corporation will debit the account Treasury Stock and will credit the account Cash.)
Some states' laws require or may have required common stock issued by corporations residing in their states to have a par value. The par value on common stock has generally been a very small amount per share. Other states might not require corporations to issue stock with a par value. So the par value on common stock is a legal consideration.
From an accounting standpoint, the par value of an issued share of common stock must be recorded in an account separate from the amount received over and above the amount of par value. For example, if a corporation issues 100 new shares of its common stock for a total of $2,000 and the stock's par value is $1 per share, the accounting entry is a debit to Cash for $2,000 and a credit to Common Stock—Par $100, and a credit to Paid-in Capital in Excess of Par for $1,900. In total the Cash account increased by $2,000 and the paid-in capital reported under stockholders' equity increased by a total of $2,000 ($100 + $1,900).
If a corporation is not required to have a par value or a stated value and the corporation issues 100 shares for $2,000, then the accounting entry will be a debit to Cash for $2,000 and a credit to Common Stock for $2,000.
In other words, when the issued stock has a par value, the proceeds from the issuance gets divided between two of the paid-in capital accounts within stockholders' equity. If the issued stock does not have a par value, the proceeds from the issuance goes into just one paid-in capital account within stockholders' equity.