• From: Texas, USA
  • Registered: 02/02/2019
  • Posts: 11

Topic: No Equity class?

I'm new to accounting and FA both of which i'm trying to understand so I can use FA for my accounting needs. I'd like to know why there is no Equity class and why Retained Earnings and Share Capital have class Liability instead of Equity? For my real estate and property management business, if I want to record funds received from landlords for repairs, for example, my understanding is that I would need to debit an asset reserve account and credit an owner equity (capital) account? However, there is no Equity class or accounts. I tried to create one and put an owner capital account in it but it doesn't look right in the balance sheet where any amounts in equity gets subtracted from assets. This is confusing. Thanks for any feedback.

  • From: USA
  • Registered: 03/05/2018
  • Posts: 123

Re: No Equity class?

Retained earnings is a liability because it belongs to the owner(s) or stockholders of the company. When the owner makes an investment in the company it is essentially a loan.

I'm not sure about your situation, but I would think that the payments you receive from landlords are an accounts payable (liability), similar to loan you had to repay. Then, as you incur expenses, you could post them against the payable and record the amount of escrow in a bank (capital) account. As you pay for repairs and take money out of the bank account, you'd record the balancing entry against the account payable, reducing the amount owed.

I haven't done anything like this in FA, so I'm not sure exactly how that would work, but generally the owner's equity account would not be involved in your day-to-day business. You'd at least want a payable account for each landlord.

oakstreet1's Website

  • From: Texas, USA
  • Registered: 02/02/2019
  • Posts: 11

Re: No Equity class?

Thanks for your reply. My understanding was that owner's equity includes what they put into a business. The accounting equation, Assets = Liabilities + Equity would have the owner's capital in the equity side, wouldn't it? That's how I'm reading the accounting docs I've looked at. I am keeping one account for landlord reserves which are used for repairs. I differentiate between the properties (and landlords) by using Dimension entries for each property I manage. This was recommended by someone in the Dimension topic. I have my own brokerage income/expenses and I also track them for landlords for the properties I manage.

Landlord send me funds which I use for repairs for their specific properties. These funds belong to the landlords and not to me. There is only one account for this. When I receive a deposit from a landlord, I debit the repair reserve account, which I have created as an asset account, and I was looking to credit another account but i couldn't figure out which one should be credited. I assume it should be owner's capital or something like that which would be an equity account? This is my confusion. Thanks.

  • From: USA
  • Registered: 03/05/2018
  • Posts: 123

Re: No Equity class?

Assets = Liability + equity because equity is treated like a liability.

If I understand you, correctly, you essentially have an asset account (think of it as a bank account) that collects contributions from the landlords of the properties you manage.

When you enter a payment from a landlord, you're going to debit the bank account (asset) and credit the accounts payable account that you set up for that landlord (I would recommend a payable account per landlord for tracking).

When you pay out for a repair, the money would come from your asset account (a credit) and the balancing entry would be applied as a debit to the accounts payable account.

That is how I would do it. Someone else may have more experience with that sort of business.

oakstreet1's Website

  • From: Texas, USA
  • Registered: 02/02/2019
  • Posts: 11

Re: No Equity class?

Thanks. At the moment, I'm testing all this in a development install I have set up. Once I figure out if I can use FA, set up the right chart of accounts, and learn how to make the appropriate entries, I'm going to install FA into my production environment and use it for my brokerage and landlord property management accounting going forward. In order to keep accounting simple and to a minimum, I'm trying out dimensions instead of creating an account for each landlord/property.

Question: why do I need to create a (separate) payable account for the landlord? When I receive funds from a landlord, why should it be entered into this payable account? Thanks.