Understanding Equity on the Corporate Balance Sheet

Your favorite number on the balance sheet just might be cash. It’s easy to understand and something every business has. 


But there’s a more meaningful number, at least in the long-term sense, and that’s equity. Let’s dive deeper into that part of the balance sheet. 

The Equity Section

As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. When it comes to equity, the accounts displayed are dependent on your business entity. Your business could be a sole proprietorship, a partnership, a corporation, or something else. In this article, we’ll focus on equity in a corporation. 


Every corporation should have at least three equity accounts. 

1. Stock

his account should reflect the amount of stock issued by the corporation. The amount and price of each share is usually spelled out in the Articles of Incorporation, the initial legal document of the corporation. 


For example, if the amount of shares the corporation can issue is 100,000, and they have a par value of $.01, then your stock account balance should be $1,000, which was paid in cash by the corporation’s owner(s). 


This account might also be named capital stock, common stock, or something similar. This account’s balance typically doesn’t change much over time for a small business. It’s only when new stock is purchased (issued), sold, retired or repurchased (by the corporation) that the account will see changes. 

2. Additional Paid in Capital (APIC)

Additional Paid in Capital occurs when investors and business owners pay in more than the par value price of stock. The balance represents the difference between what owners/investors paid into the company and the par value of the company stock.

3. Retained Earnings

Retained Earnings is where the action occurs, and it’s an important number to understand. It’s the accumulated earnings of the company less any dividends paid to shareholders. 


For a small business, retained earnings will change once a year at the end of the fiscal year when net profit (or loss) from the current year is rolled into the retained earnings account. At this time, all of the income and expense accounts are zeroed out to start over for the new year, and the balance (which is profit or loss) is added (or subtracted, in the case of loss) to retained earnings. Your accounting system automatically does this for you, and you can check it out by running a balance sheet as of the last day of your fiscal year, then running a balance sheet on the following day—the first day of the next fiscal year and comparing what changed. 


You can reconcile retained earnings by adding up all of your profits and losses for each year you are in business. Then subtract any dividends paid throughout the years, and you should come out with your retained earnings balance. You can have a negative retained earnings balance. 


The retained earnings number is a measure of the long-term value of the business. It also plays a large role in determining your basis, or investment, in the company, which is used for tax purposes.   


An S Corporation will have an additional fourth account in its equity section.

4. Distributions

Distributions represent the money the S Corporation owner has taken out of the business. This money is over and above the salary paid to the owner. It must be tracked for tax purposes, which is why it has a separate account on the balance sheet. In simple terms, distributions are generally not taxable as long as the owner has enough basis to cover them. In this way, distributions are different from dividends that are issued in C Corporations, since they are taxable.


Finally, if you run a balance sheet report in your accounting system on any date during the year, you may see an additional account:

5. Current Year Earnings

This is the sum of all of your income and expense accounts. It should be the same number as net profit or loss on your income statement from the beginning of the year to your balance sheet date. On a formal balance sheet for external purposes, this number is rolled into the retained earnings account. 


The equity section can be the most difficult section to understand on the balance sheet. Hopefully, the explanation above will provide a bit more clarity and shine a light on the significance of the retained earnings balance. 

Our Latest Insight

Outsourced Accounting vs. Fractional Accounting: What’s the Difference?

By Alisa McCabe • April 15, 2025
As a service-based business owner, managing finances effectively is key to growth and profitability. When looking for financial support, you may come across terms like "outsourced accounting" and "fractional accounting." While they may sound similar, they serve different purposes and offer unique benefits. Understanding the differences can help you decide which approach best suits your business needs. What is Outsourced Accounting? Outsourced accounting refers to hiring an external firm to handle bookkeeping and financial reporting tasks on an ongoing basis. This solution is ideal for businesses that need consistent, reliable financial management but don’t require a full-time, in-house accounting team. Key Benefits of Outsourced Accounting: Cost-Effective: More affordable than hiring an internal accounting department. Scalability: Services can be tailored to your business size and needs. Access to Expertise: Work with professionals who specialize in bookkeeping, payroll, and tax preparation. Technology-Driven: Many firms use cloud-based software like QuickBooks Online for efficiency and real-time reporting. What is Fractional Accounting? A fractional accounting firm provides higher-level financial strategy and decision-making support, often acting as a part-time CFO or controller. This approach is best for businesses that need more than basic bookkeeping but don’t yet require a full-time financial executive. Key Benefits of Fractional Accounting: Strategic Financial Oversight: Helps with budgeting, forecasting, and financial planning. Higher-Level Expertise: A fractional CFO or controller can provide insights beyond day-to-day transactions. Customizable Support: Businesses can engage a fractional firm for a few hours a week or month based on their needs. Growth-Focused: Ideal for scaling companies needing financial strategy without the full-time cost of an in-house CFO. Which One is Right for Your Business? The choice between outsourced and fractional accounting depends on your business size, complexity, and financial goals. Choose Outsourced Accounting if: You need reliable bookkeeping, payroll management, and financial reporting but don’t require deep financial strategy. Choose Fractional Accounting if: Your business is growing, and you need financial leadership, cash flow management, and strategic planning without the cost of a full-time CFO. The Best of Both Worlds Some firms, like First Steps Financial, offer both outsourced accounting and fractional CFO services. This allows businesses to start with outsourced accounting and scale up to fractional services as they grow, ensuring they always have the right financial support. Both outsourced accounting and fractional accounting firms can play a crucial role in your business’s success. The key is understanding where your business stands today and what level of financial expertise will help you achieve your long-term goals. If you’re unsure which option is best for you, First Steps Financial can help! Contact us today to discuss your needs and find the right financial solution for your business.

Train, Trust, and Let Go: How Great Leaders Build Confident Teams

By Alisa McCabe • April 4, 2025
Don’t overinspect or oversupervise. Allow your leaders to make mistakes in training, so they can profit from the errors and not make them in combat. -Col. Glover Johns We had just hit the jackpot. A Chinese submarine crossed our path in an area where no one expected it to be. This should have been a massive win for U.S. intelligence, our ship, and us as SONAR technicians. But there was one problem: no one made the call. The submarine was only discovered in post-analysis days later. What should have been a career-defining success became a failure for our SONAR team due to hesitation and lack of confidence. One of my teammates saw the submarine—its frequencies matched, it behaved like a submarine, and all the indicators were there. But he didn’t speak up. He was afraid of being wrong. When this failure came to light, our team had a meeting to figure out what went wrong. The teammate who had seen it was devastated. He felt like he had failed the entire crew. Our immediate supervisor didn’t help—he picked apart every mistake, repeatedly asking, “How could you miss this? I’ve shown you this a million times!” After a few minutes of this, his boss stepped in. He asked how we were being trained. The answer was obvious to all of us. Our supervisor was a doer, not a teacher. He couldn’t stand to see mistakes, so instead of letting us learn, he micromanaged and took over. The result? We lacked the confidence and knowledge to make decisions because we had never been trusted to. At this point, you might think, “What a terrible leader!” And you’d be right—at least in this instance. But what you might not realize is that even good leaders fall into this trap. And you’re not immune to it either. If you have kids, I guarantee you’ve stepped in and done something for them because they were taking too long. If you run a business, you’ve likely taken over a task because you didn’t trust an employee to do it right. It feels like the right move in the moment, but it’s not. It is the easy way out. The answer is simple: real leadership requires patience. It’s easier to take over than to teach. So how do we break this cycle? It takes discipline. Step one: provide the right training. No one becomes an expert overnight, but they need a foundation strong enough to work from. Encourage questions and never make people feel stupid for asking. If they’re afraid to ask, they’ll be afraid to act. Step two: let go. You have to trust the people you train. Set expectations clearly and then step back. Resist the urge to jump in. Step three: debrief. Go over the work. Point out successes and failures. Then, instead of just pointing out what went wrong, show them how to do better. Follow these steps, and I guarantee you’ll build a team that has the knowledge and confidence to make the call. Written by: Marc Chianese, CPA Candidate

The Importance of Clean Books: How We Help Small Business Owners Stay on Track

By Alisa McCabe • March 21, 2025
As a small business owner, keeping your financials in order is crucial—especially when it’s time to file taxes. Many small business owners come to us for cleanup services because they realize their books don’t reflect their actual business activity. Without accurate financials, you’re flying blind when it comes to planning, decision-making, and tax compliance. Here’s how we help small businesses clean up their books and get back on track: Step 1: Assess the Situation Our first step is to review your books and identify: What looks incorrect: We spot errors like negative balances, uncategorized transactions, or inconsistencies. What needs to be cleaned up: Issues like unreconciled accounts or miscategorized expenses. How to improve going forward: Suggestions to ensure your books remain accurate and useful. Common Issues We See in Small Business Books Here are some of the most frequent problems we uncover: Uncategorized transactions: These don’t show up in your financial reports, leaving you with an incomplete picture of your business. Bank and credit card accounts not reconciled: Without reconciliation, you can’t trust the accuracy of your financials. Large balances in the undeposited funds account: Often caused by customer payments not applied to invoices, leading to double-recorded income. Negative balances on the balance sheet: This usually indicates recording errors, like misapplied payments or incomplete loan setup. Inconsistent expense categorization: For example, telephone bills recorded under different accounts, making it harder to compare year-over-year trends. Step 2: Clean and Reconcile Once we’ve assessed your books, we tackle the cleanup process step by step: Categorize all transactions in holding: Ensuring they appear in your financials. Reconcile every bank, credit card, and loan account: Without reconciliation, there’s no confidence that your numbers are accurate. Apply customer payments to invoices: This prevents double-counting income and ensures your sales figures are correct. Review accounts with large balances: For example- A large sales tax liability may indicate payments are being recorded as expenses instead of reducing the liability. A negative loan balance could mean the original loan wasn’t recorded properly. Check for consistent categorization: We run reports to ensure, for example, that all telephone bills are categorized under the same expense account. Step 3: Build Confidence in Your Financials After cleaning up the books, you’ll gain: Accurate financials: Confidence that your reports reflect reality. Insights into past trends: So you can make informed decisions about the future. Ready for filing taxes: Avoid overpaying taxes by ensuring income is recorded only once. For instance, if customer payments are recorded as new income instead of being applied to existing invoices, you’ll overstate your revenue—and could end up paying taxes on double what you actually earned! Step 4: Prevent Future Problems We don’t stop at cleanup. We provide training and tips to help you: Keep your books accurate moving forward. Spot and fix issues early before they become major problems. Why Accurate Books Matter Accurate financials allow you to plan for the future of your business. Whether it’s forecasting cash flow, preparing for growth, or filing taxes, clean books give you the clarity and confidence to make smart decisions. Ready to clean up your books and take control of your financials? We’re here to help! Reach out to get started. Written By: Diane Roberts

CONTACT US

Contact Us