July 5, 2020


Accounting + Finance Blog

Business term: What is equity? Meaning and Explanations

Business cannot involve in what scientists term evolution. Businesses are formed for a particular purpose with an aim. For a business to exist, the owner(s) must contribute a certain amount of money they believe can make the business be alive and run it for some months before it starts earning revenue. Such contributions are referred to as capital. For companies, it is called Equity.

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What is Equity?

According to the International Accounting Reporting Standard (IFRS) conceptual framework, “Equity is the residual interest in an entity after the value of its liabilities is deducted from the value of its assets.

Equity is the net balance in an organization after deducting total liabilities from total assets.

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Equity is the net worth of a business. It is the money used to start up a business.

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Key Explanations

From the first and second definition of Equity, Equity is the remaining balance after Liabilities is subtracted from Assets. The Accounting Equation states that Assets is a combination of Liabilities and Capital. Capital also means Equity. That is Assets = Liabilities + Equity. When you make Equity stands out, Equity = Assets – Liabilities

A change in Assets and/or Liabilities will increase or decrease Equity. This is referred to as profit. Another statement of financial position items that can change equity is the capital and general reserves, bonus shares, share premium, share discount, issue of new shares and repayment of debts with Equity.

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Equity is the net balance. That is the difference between liabilities and assets. If the firm’s assets totalled 340,000 Naira and the liabilities is 120,000 Naira. Then the Equity is 220,000 (i.e, 340,000 – 120,000).

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In asset financing, it is either the business used its equity to finance it or a combination of Equity and Liabilities. However, if Equity is unknown. The knowledge for the figure of Liabilities and Assets can be used to get the value of Equity as explained in the above paragraph.

Equity is also the net worth of a business. Net worth is similar to net balance. Therefore, there is no detailed explanation.

Equity is used to start a business. A person planning to start a business must set aside money it will use to do so. This is mostly from his or her personal savings. Such money required by the businessman is referred to as Equity or capital. As it is most likely called.

In the next article, the term: liabilities are defined and explained.

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