When the shareholders invest in a corporation, shares are issued. A typical journal entry would be:
The shares represent how much of the corporation is owned by each shareholder. In a proprietorship, there is only one owner, and the proprietorship and owner are not considered to be separate legal entities. As a result, there is no need to keep track of share capital and retained earnings in separate accounts as in a corporation. When an owner invests in a proprietorship, a typical journal entry would be:
When a corporation earns net income, it is closed to the Retained Earnings at the end of each fiscal year. When a proprietorship earns net income, the income statement accounts are closed to the same Proprietor’s Capital account.
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