Equity is the value that would be returned to shareholders if all of the company’s assets were liquidated and all of the debts were paid off. An increase in the equity account results in a credit entry whereas a decrease results in a debit entry. Accounts that are credited with an increase are referred to as credit accounts.
Why Equity Is A Credit Account?
An equity account is referred to as a credit account because it is credited with an increase and debited with a decrease. The increase in equity means any transaction that adds to the value of equity and the decrease represents transactions that reduce the equity balance.
To understand the credit concept of equity, keep in mind the business entity concept which states that transactions that relate to owners must be separated from the business as they both (the business and owners) are separate entities. That being said, any capital contributed by owners is the liability of the business, and an increase in liabilities results in credit entry. Therefore, equity is also credited with an increase because it basically, is the liability of the business.
For example, when a partner or shareholder makes a contribution (increase in equity), the double-entry will be as follows.
| Cash | Debit |
| Ordinary Shares/Common Stock | Credit |
Similarly, corporate share buybacks, that is when a company buys back its own shares (Decrease in Equity), result in the following double-entry.
| Treasury Stock | Debit |
| Cash | Credit |
A: Transactions that result in an increase in the equity account results in a credit entry.
A: Equity is debited when a decrease occurs in the equity account.
Related Article: When to Credit and When to Debit
Article Sources
- https://corpgov.law.harvard.edu/2019/05/18/are-share-buybacks-a-symptom-of-managerial-short-termism/
- https://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp
