Which of the following accounts is reported in the Equity section of the statement of financial position?
a. Dividends.
b. Share capital – ordinary.
c. Revenues.
d. All of the choices are reported in the Equity section of the statement of financial position.
The correct answer and explanation is :
The correct answer is b. Share capital – ordinary.
Explanation:
The Equity section of the statement of financial position (also known as the balance sheet) represents the ownership interest of shareholders in a company. This section includes items that reflect the residual interest in the assets of the entity after deducting its liabilities.
Let’s break down the options to understand which ones belong in the equity section:
- Dividends:
- Dividends are distributions of a company’s profits to its shareholders, but they are not part of the equity section of the balance sheet. Instead, dividends reduce retained earnings, a component of equity, once declared. Therefore, dividends themselves are not reported in the equity section, but the effect of dividends is seen in the retained earnings line after the declaration.
- Share capital – ordinary:
- Share capital (ordinary) represents the amount of money that shareholders invest in the company by purchasing shares. This is reported in the equity section of the statement of financial position. Share capital is a key part of equity because it reflects the initial investment made by the company’s owners (shareholders). It increases the company’s equity, as it is the capital provided by shareholders in exchange for ownership.
- Revenues:
- Revenues are reported in the income statement, not in the equity section of the balance sheet. Revenues represent the company’s earnings from its primary business activities, such as sales of goods or services. While revenues impact equity (through their effect on retained earnings), they are not directly reported in the equity section.
- All of the choices are reported in the Equity section of the statement of financial position:
- This option is incorrect because dividends and revenues are not reported in the equity section directly.
Thus, Share capital – ordinary is the only account listed that is reported in the equity section of the balance sheet, as it represents the ownership stake that shareholders hold in the company.