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Business Financials – Equity meaning in your accounting financials
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Published on Monday, 10 October 2022 15:46
What is equity, where is it in the accounting financial reports and what does it tell us?
By deducting Liabilities from the Assets of the Business (at cost value), we are left with Equity.
Assets, Liabilities and Equity are listed in the Balance Sheet financial statement.
Another way is -
ASSETS – LIABILITIES = EQUITY
In a company Balance Sheet, Equity is the amount of money contributed by the owners/share/stock-holders PLUS the Retained Earnings (Profit/Loss of past years).
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 –
- Capital
- Drawings and
- Current Year Net Income/Earnings
Shareholder Equity may consist of accounts such as –
- Paid-In Capital
- Retained Earnings/Net Income
- Less Treasury Stock
- Preferred Stock
- Common Stock
- Paid-In Capital in Excess of Par Value
- Treasury Stock (stock re-purchased from shareholders)
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.
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