Bookkeeping Basics: Understanding Equity

 We’re continuing our Bookkeeping Basics series, and today I want to walk you through a topic that often feels confusing or intimidating: Equity.

The good news? You really don’t need to go deep into the weeds to understand what equity is or why it matters for your business. Let’s keep this simple and practical.

What is Equity?

Equity represents ownership in a company. In a corporation, it shows what the shareholders own after liabilities are accounted for. Think of it as the value that belongs to the owners of the business.

On your financial statements, equity is one of the three main sections of the Balance Sheet, alongside assets and liabilities.

The 3 Main Types of Equity You’ll See

1. Common Stock
   This is the amount invested by the shareholder(s) when the corporation was first set up.
   It could be $1, $10, $100, or more — whatever was decided at incorporation by your lawyer or accountant.

This number usually doesn’t change often.

2. Dividends Paid
   Dividends are payments made to shareholders from profits.

Important note: dividends are not the same as repaying a shareholder loan.

If you have a shareholder loan, that should be repaid before dividends are paid.

Dividends must be reported personally (in Canada, on a T5), while shareholder loan repayments do not.

3. Retained Earnings
   This is a big one — and the one that changes every year.

Retained earnings are your prior years’ profits (or losses).

At the end of each year, your total sales minus expenses equals your profit or loss, and that number rolls into retained earnings.

It’s a running total that carries forward year after year.

What You Don’t Need to Stress About

Equity calculations and adjustments are typically handled by your bookkeeper and accountant. You don’t need to manage this daily or make complex decisions around it.

What is helpful is knowing:

• What equity represents
• Why it appears on your balance sheet
• The difference between dividends and shareholder loans

We’ll talk more about how equity shows up when we dive deeper into the Balance Sheet, but for now, this foundation is more than enough.

As always, if you have questions or want a topic explained more, just let me know. I’m always happy to help.