Final answer:
In proprietary funds, equity is represented by 'net position', which is the equivalent of net worth or bank capital in a typical balance sheet. The 'T-account' helps explain this concept, where assets must equal the sum of liabilities and net worth. A bank's balance sheet illustrates these principles with assets like loans and reserves and liabilities such as customer deposits.
Step-by-step explanation:
When discussing proprietary funds, the term equity can be represented by net position, rather than fund balance. This concept is analogous to a company's balance sheet where the bank's equity, also referred to as net worth or bank capital, is the difference between total assets and total liabilities. In the context of governmental accounting, which is where proprietary funds are most often found, the equity of these funds is reported as a net position in a statement of net position.
The usefulness of a T-account comes into play as an educational tool in this explanation. This accounting tool showcases that on one side there are assets, and on the other side, there are liabilities and net worth. For a bank's balance sheet, assets include items like reserves, loans made, and securities purchased, while liabilities primarily consist of deposits made by customers which the bank owes. The net worth helps balance out the equation so that assets always equal liabilities plus net worth. Therefore, in proprietary funds, net position reflects the cumulative results of operations, including net investment in capital assets, restricted and unrestricted components.