Definitions and sources of owner’s, partners’ and stockholders’ equity:

Ownership equity is the residual interest in the assets of the entity after deducting all its liabilities. In the accounting equation as presented in the balance sheet, equity equals assets minus liabilities. This means that ownership equity is composed of all the entity’s resources which are not obtained from debts. In other words, it consists of all the resources derived from owners’ contribution.

Equity differs depending on the structure of an entity. A sole proprietorship which is owned solely by a proprietor presents its equity as an owner’s equity. Accounting for owner’s equity in a single proprietorship is simple. Owner’s equity in this form is increased when the owner contributes capital or realizes net profit. It is then decreased when the owner draws capital or incurred a net loss.

The equity of a partnership entity which is called partners’ equity is similar with the single proprietorship equity. The only difference is that the partnership has more than one owner unlike a single proprietorship entity. The partners’ equity is increased by the partners’ capital contribution or by realization of net profits or income. It is then decreased by the partners’ capital drawings and share on net losses.

For corporations, equity is called stockholders’ equity or sometimes shareholders’ equity. Owners of a corporation are called stockholders (or shareholders), because they own and hold shares of the company’s stock. Stock certificates are paper evidence of ownership in a corporation. Stockholders’ equity is increased when the corporation’s capital stock are subscribed and issued, when it earns net profit, when there is revaluation increment on the fair value of assets, and when there are adjustments to the retained earnings that will cause equity to increase. On the other hand, stockholders’ equity decreases when the corporation incurs a net loss, distributes dividends to stockholders, and when there are adjustments to retained earnings that causes a decrease to stockholders equity. The stockholders equity is usually composed of capital stock (common or preferred), additional paid in capital, treasury shares, revaluation reserves, and retained earnings or deficiency.

Owner’s, partners, and stockholders’ equity are resources of an entity which come from its owners. While resources obtained through debts cause an entity to incur a finance cost charged by its creditors, owner’s equity causes an entity to pay dividends or profit distribution to its owners. Since equity is equal to assets minus liability, it is understood that the sources of equity are the resources contributed by the owners. These contributions include financial capital namely cash, receivables, investments and reduction or offset of payables; and physical capital namely, inventories and property, plant and equipment. Equity can be also obtained without consideration through donations included as a donated fund or capital.

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