Answered: Equity Accounts 1) Common Stock 2)…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Equity Accounts

1) Common Stock

2) Preferred Stock

3) Retained Earnings

4) Additional paid-in-capital

5) Owners Capital

6) Parnter's Capital

Please explain the differences between the equity accounts and how and when they are used.

Expert Solution

Step 1

Some of the equity accounts:

Common stock: Common stock shows the balance of common stock issued by the company and investors holding common stock are the real owners. This account is used when businesses issue common stock. It increases with the issue of common stock.
Preferred stock: Preferred stock shows the balance of preferred stock issued by the business, preferred stockholders do not have the right to vote like common stockholders. Preferred stock receives a fixed rate of dividend if the business earns sufficient profits.
Retained earnings: It shows the balance of accumulated past profits less dividends. It can be used when business requires funds. It increases with the increase in net profit.

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