Question

Different equity accounts are used depending on the type of organisational structure of the business. Illustrate and explain. (80 - 150 words)

Answer 1

Equity is the amount funded by the owners or shareholders of a company for the initial start-up and continuous operation of a business. There are different types of equity accounts they are

Common Stock

Common stock represents the owners’ or shareholder’s investment in the business as a capital contribution. This account represents the shares that entitle the shareowners to vote and their residual claim on the company’s assets.

Preferred Stock

Preferred stock is quite similar to common stock. The preferred stock is a type of share that often has no voting rights, but is guaranteed a cumulative dividend. If the dividend is not paid in one year, then it will accumulate until paid off.

Contributed Surplus

Contributed Surplus represents any amount paid over the par value paid by investors for stocks purchases that have a par value. This account also holds different types of gains and losses resulting in the sale of shares or other complex financial instruments.

Additional Paid-In Capital

Additional Paid-In Capital is another term for contributed surplus, the same as described above.

Retained Earnings

Retained Earnings is the portion of net income that is not paid out as dividends to shareholders. It is instead retained for reinvesting in the business or to pay off future obligations.

Treasury Stock (contra-equity account)

Treasury stock is a contra-equity account. It represents the amount of common stock that the company has purchased back from investors.