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Business Finance 101 – What is Equity?

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Business Finance 101 – What is Equity?

Business Finance 101 – What is Equity?

I am asked at times – what is equity? If we deduct Liabilities from the Assets of the Business (at cost value), we are left with Equity. These are listed in the Balance Sheet financial statement. Another way is –

ASSETS – LIABILITIES = EQUITY

Equity is also sometimes used to refer to as ownership of shares in a company.

In a company Balance Sheet it is the amount of money contributed by the owners/share/stock-holders PLUS the Retained Earnings (Profit/Loss of past years).

Also note – because assets like plant and equipment are entered at their COST amount (less GST) the MARKET value of the asset is not represented, unless an adjustment is made (by journal) to reflect change of value (and increase or decrease of asset value are then balanced in a special sale or cost of sale asset account). Hence the Company Market Value may not be the true Market Value, unless the adjustment has been made.

Equity can be called Owner’s Equity – for Sole Proprietors, or Shareholder/Stockholder Equity for a company (usually with more than one director).

Owner’s Equity may consist of several accounts –

1.     Capital

2.     Drawings and

3.     Current Year Net Income/Earnings

Shareholder Equity may consist of accounts such as –

1.   Paid-In Capital

  • Preferred Stock
  • Common Stock
  • Paid-In Capital in Excess of Par Value
  • Treasury Stock (stock re-purchased from shareholders)

2.   Retained Earnings/Net Income 

3.   Less Treasury Stock

Equity is also used in several important ratios that help determine financial health of the business, such as Debt to Equity and Return on Equity.

Need help? Not sure?

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Author: accountkeepingplus

Administration, bookkeeping and compliance for small business, Training, trouble-shooting, or we can do the books and payroll for you! Self Managed Superannuation Fund Service Provider, free support MYOB Certified Consultant, Reckon/QuickBooks Professional Partner.

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