In this post, we will talk about What is Equity, Equity Definition, Equity as Accounting Equation, Equity as an Investment opportunity, and as disclosed in Financial Statements. There are indeed many accounting and finance concepts that cannot be avoided even by a layman. For a myriad of reasons,This is one of them. It is not one of those concepts that are known and used by only the professionals and specialized individuals; hence, its understanding is paramount.
Definition of Equity:
While there are a few other ways the term “Equity” is put to use, these are the major definitions. These concepts mean different things but function the same way as they have the same foundation.
- In accounting, This is the difference between what your business is worth, that is, your assets, less your debts and liabilities. This is usually known as the accounting equation.
- Regarding financing, It represents the ownership interest of investors in a business or company. It is usually gotten from the number of shares owned by investors in the business. In other words, your stake in a company through common stock, as well as other types of securities, is what is known as your share in that business.
- As far as financial statement disclosure is concerned, the part of the statement of financial position that is regarded as the Equity portion is the one that shows how much the owners of the business contributed towards it.
Equity as the Accounting Equation:
The accounting equation also known as the balance sheet equation is simply the relationship between the assets, liabilities, and owner’s share of the business. What the accounting equation posits is that that all assets owned by a business must have either been financed by the use of debts and loans or by the contributions by the shareholders of the business. In a financial statement, both sides of the statement of financial position (balance sheet) are to equate. In other words, for every transaction, total debits must equal the total credits. It is thus the basis for the double entry system of accounting.
Equity as a method of financing/investment option
There are three different ways an individual can finance a business. First, he or she can use personal savings straight out of his or her purse. The second way is to obtain financing from banks and other sources of borrowing, while the third is E financing. As a company owner, some shares an individual has in your company represents their stake in your business. On the flip side as well, if you invest in a company by buying stock or shares, its value or percentage is the ownership interest that’s yours. It’s your piece of the pie.
Equity as disclosed in a financial statement
In the financial statement, Assets are disclosed and broken down into current and non-current assets. Liabilities are also broken down into current liabilities as well as long-term liabilities. In the same vein, It is disclosed in the financial statement. This part shows how much the shareholders have contributed. It is usually shown as the total of the relevant line items.
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