What Is Equity

Total assets minus total liabilites

Tina S
Tina S
Mar 31, 2010
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Simply we can say, EQUITY IS NOTHING BUT ITS ONLY A WAY OF COLLECTING CAPITAL through the investor in favor of a company.

Equity is the capital amount which is raised or contributed by the members of the company.

For example, if your home is worth $300,000 and you owe $100,000, you have $200,000 in equity. Over time, as you reduce the amount you owe on your home or the value of your home grows, your equity increases. It's that simple.

Equity also refers to the difference between an asset's current market value -- the amount it could be sold for -- and any debt or claim against it. For example, if you own a home currently valued at $300,000 but still owe $200,000 on your mortgage, your equity in the home is $100,000.

The net worth of a company. This represents the ownership interest of the shareholders (common and preferred) of a company. For this reason, shares are often known as equities.

We can also say that whenever any new venture is going to start then owner give offer to investor to invest. After investing every investor got a fixed share in ratio of their invested money, that is Known as equity.

Owning a business free and clear of any long-term liabilities is the dream of the business owner.  For when this condition exists, the owner is usually in the position of realizing gains, and of also realizing they have been successful in the operation of their business.

The ownership claim on total assets in known as owner’s equity. It is equal to total assets minus total liabilities. Here is why: The assets of a business are supplied or claimed by either creditors or owners. To find out what belongs to owners, we subtract the creditors’ claims (the liabilities) from assets. The remainder is the owner’s claim on the assets- the owner’s equity. Since the claims of creditors must be paid before ownership claims, owner’s equity is often referred to as residual equity.

The owner’s equity column is also the difference on the balance sheet between asset and liability accounts.  The accounting equation used to represent this is:

Assets - Liabilities = Owner’s Equity

This is one of the oldest building blocks of the accounting industry.  The one equation an accounting student will learn in the beginning of the education, and will still be using diligently, when they finish their accounting career.


Increase in owner’s equity:

In a proprietorship, owner’s equity is increased by owner’s investments and revenues.

Investments by owner. Investments by owner are the assets the owner puts into the business. These investments increase owner’s equity.

Revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. Generally, revenues result from the sale of  merchandise, the performance of services, the rental of property, and the lending of money.

Revenues usually result in an increase in an asset. They may arise from different sources and are identified by various names depending on the nature of the business. Campus Pizza, for instance, has two categories of sales revenues-pizza sales and beverage sales. Common sources of revenue are sales, fees, services, commissions, interest, dividends, royalties and rent.

Decrease in Owner’s Equity:

In a proprietorship, owner’s equity is decreased by owner’s drawings and expenses.

Drawings. An owner may withdraw cash or other assets for personal use. These withdrawals could be recorded as a direct decrease of owner’s equity. However, it is generally considered preferable to use a separate classification called drawings to determine the total withdrawals for each accounting period. Drawings decrease owner’s equity.

Expense. Expenses are the cost of assets consumed or services used in the process of earning revenue; they are decrease in owner’s equity that result from operating the business. Expenses represent actual or expected cash outflows.

Equity gives ownership. If anyone owns stock, he/she has equity in, or own a portion -- however small -- of the company that issued the stock.


Author's note: Ref: Accounting Principles: Weygandt, Kieso, Kimmel.
Keywords: equity,accounting,finance,liabilities,asset,balance sheet,

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