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Business Financials – What is equity?
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Published on Thursday, 14 July 2016 15:27
Several times I get asked – What is equity?
After Liabilities are taken from the Assets of the Business (at cost value), we are left with Equity.
ASSETS – LIABILITIES = EQUITY
In other times it is used to refer to ownership of shares in a company.
On the 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).
Note - Because assets 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 also 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 –
- Capital
- Drawings and
- Current Year Net Income/Earnings
Shareholder Equity may consist of accounts such as –
- Paid-In Capital
- Preferred Stock
- Common Stock
- Paid-In Capital in Excess of Par Value
- Treasury Stock (stock re-purchased from shareholders)
- Retained Earnings/Net Income
- Less Treasury Stock
Equity is used in several important ratios that help determine financial health of the business, such as Debt to Equity and Return on Equity.
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