Generally speaking, because the profit is earned by the enterprise, it belongs to the enterprise itself like the paid-in capital.
Definition of owner's equity: refers to the economic benefits enjoyed by the owner in the assets of the enterprise, and its amount is the balance of assets MINUS liabilities. Understanding of owners' equity owners: Generally speaking, there are two sources of funds for enterprises: one is shareholders' investment, that is, owners' equity, and the other is borrowing funds, that is, liabilities.
What is the "owner" in the owner's equity?
Owners' equity, also known as property rights, refers to the ownership of investors (shareholders) to the net assets of an enterprise. The owner's equity is equal to the balance of all assets minus all liabilities of the enterprise in quantity, which mainly comes from the initial investment and additional investment of the enterprise investors and the retained earnings realized by the enterprise in the process of production and operation. There is a clear difference between owner's equity and liabilities. Mainly in the following aspects:
(1) Creditors' claims on enterprise assets have priority over owners' equity. When an enterprise is liquidated, assets are first used to repay liabilities after paying bankruptcy liquidation expenses. If there are surplus assets, they can be distributed among investors according to the proportion of capital contribution. Therefore, in this sense, owner's equity is the investor's right to claim the remaining assets after deducting liabilities from the total assets of the enterprise.
(2) Investors of enterprises can participate in the operation and management of enterprises by virtue of their ownership, while creditors often have no right to participate in the operation and management of enterprises.
(3) For the owner (i.e. the investor), it is generally impossible to recover the investment in advance except for reducing the capital according to legal procedures in the case of continuous operation of the enterprise. Liabilities generally have a prescribed repayment period and must be repaid within a certain period of time.
(4) Investors participate in the profit distribution of enterprises in the form of dividends or profits. Creditors can not participate in the profit distribution of enterprises, but can only get remuneration and interest income according to the prescribed conditions.
What does it mean to convert liabilities into owners' equity?
Turning liabilities into owners' equity means that the creditors of an enterprise turn their debts into investments in the enterprise, that is, turn their liabilities into owners' equity.
Usually, the accounting entries for converting liabilities into owners' equity are as follows:
Borrowing: short-term loans/long-term loans, etc. : paid-in capital.
Liabilities refer to the current obligations formed by past transactions or events of an enterprise, which are expected to lead to the outflow of economic benefits from the enterprise.
Debt is essentially an economic debt that an enterprise must repay after a certain period of time. Its repayment period or specific amount has been stipulated and restricted by the contract and articles of association when it occurs or is established, and it is an obligation that an enterprise must perform. Owner's equity refers to the assets minus liabilities of an enterprise.
Legal basis:
Article 6 of the Law of People's Republic of China (PRC) on the Protection of Consumer Rights and Interests
Protecting the legitimate rights and interests of consumers is the common responsibility of the whole society. The state encourages and supports all organizations and individuals to conduct social supervision over acts that harm the legitimate rights and interests of consumers. The mass media should do a good job in propaganda to safeguard the legitimate rights and interests of consumers, and conduct public opinion supervision over acts that harm the legitimate rights and interests of consumers.