The equity account and the private account

The account 'Equity' refers to the funds that a business owner has invested in the business over a long period of time, while the 'Private' account is a subaccount of the 'Equity' account.

The Equity Account

The 'Equity' account determines the amount of debt the company owes to the business owner. In a sole proprietorship, the success or failure of the business is directly accounted for with this account at business closure, as the business owner has provided all the capital and therefore bears any profit or loss alone. By contributing additional funds, he can increase the equity, while withdrawals can reduce the equity.

The equity represents the amount that the owners of a business provide to it in the long term.

The Private Account

In a sole proprietorship, it can regularly happen that transactions which would actually concern the private household are paid for or collected by the sole proprietorship. Essentially, these would be capital contributions or capital reductions. However, these transactions are not booked through the 'Equity' account but through the 'Private' account. The reason is that otherwise, the equity account would become very cluttered. Only at the annual closing is the difference between debit and credit of the private account transferred to the equity account. Thus, the balance of the Private account becomes zero. In legal entities (e.g., corporation, LLC), there are no private accounts. In legal entities, terms used are receivables and liabilities, a private area as in the case of partnerships does not exist.