Distinguish equity accounts in a sole proprietorship versus a corporation.

• A. Sole proprietorship uses Common Stock, Additional Paid-In Capital, and Retained Earnings; corporation uses Owner's Capital and Drawings.
• B. Sole proprietorship uses Drawings; corporation uses Common Stock.
• C. Sole proprietorship uses Owner's Capital and Drawings; corporation uses Common Stock, Additional Paid-In Capital, and Retained Earnings with separate legal identity.
• D. Sole proprietorship and Corporation have identical equity accounts.

Answer: (C)

Equity accounts reflect who owns the business and how that ownership is funded and withdrawn. In a sole proprietorship, there is a single owner and no separate legal entity, so the owner's stake is shown mainly through Owner's Capital, which records the owner's investment and the accumulated profits or losses that increase or decrease that capital. Withdrawals for personal use are tracked as Drawings and reduce the owner's capital.

In contrast, a corporation is a separate legal entity with its own equity structure. Ownership is represented by shares, and the equity accounts include Common Stock to show issued shares, Additional Paid-In Capital for amounts paid over par value, and Retained Earnings for accumulated profits kept in the business.

This distinction—sole proprietorship using Owner's Capital and Drawings, and corporation using Common Stock, Additional Paid-In Capital, and Retained Earnings due to its separate legal identity—best captures how equity is organized in each form.