Owner’s equity is the term appropriate for PROPRIETORSHIPs, while owners’ equity applies to PARTNERSHIPs and CORPORATIONs. Both terms represent the owners of a firm. Equities represent internal claims against a firm’s ASSETS (the investors/owners), while liabilities represent external claims (the firm’s creditors). Often a firm’s EQUITY is referred to as the residual equity. If the firm were to become insolvent, go bankrupt, or for some reason have to liquidate its assets, the liabilities must be repaid in full before the equity owners receive any proceeds from selling off the assets. A transposition of the accounting equation Assets = Liabilities + Owners’ Equity to Assets – Liabilities = Owners’ Equity illustrates the concept of residual equity; any assets remaining after satisfying the firm’s debts belong to the firm’s owners. In proprietorships and partnerships, revenues and the investment of CAPITAL by the owner(s) increase equity. Expenses and withdrawals by the owner(s) decrease equity. Along with liabilities, equity is an important source of capital for these firms. In corporations, owners’ equity is increased by revenues and by the sale of stock. Expenses and the repurchase of a firm’s stock (called treasury stock when repurchased) decrease owners’ equity. On corporate BALANCE SHEETs, owners’ equity is divided into two sections to clearly indicate the sources of the equity capital: contributed capital and retained earnings. Contributed capital comes from the sale of the firm’s stock. Retained earnings arise when the firm does not distribute all of its earnings to stockholders in the form of dividends. Rather than paying dividends, the firm is retaining its earnings. Along with liabilities, owners’ equity is an important source of corporate capital.
See also DIVIDENDS, RETAINED EARNINGS; LIABILITY.