January 22, 2021

SB-Accounting

Accounting + Finance Blog

Meaning of Equity Capital and Key Explanations
2Shares

Equity capital is an investment in a company. The aim generally is to provide finance for the business. The fund may be available at the inception of the company, provided at periodic intervals and during the life span of the business.

Definition of Equity Capital

Equity capital is the capital provided by the owner and investors of a business either before the commencement of the business or/and at other periods.

Equity capital can also be defined as the fund provided by the business owners and other investors for the appropriate running of the business.

Ads you may like

However, Equity, according to IFRS conceptual framework, is the residue value of assets after deducting liabilities. This includes the equity capital invested, accumulated retained earnings, reserves and offsetting of treasury stocks.

READ ON  Meaning of Retained Earnings and key Explanations

This article focuses on equity capital.

Key Explanations

A type of capital. Equity capital is a type of fund provided to an entity. Another type of finance is debt capital.

Provided by business owners. Ordinarily, business owners are the primary providers of this type of finance. Since they will resume ownership at commencement, they are expected to provide funds to the business.

Ads you may like

Provided by investors. The secondary providers of Equity capital are investors. Investors include Angels, venture capitalists, company’s shareholders, aside from others.

On one side, Angels are individual investors. It might be a family member or a close friend. It might also be an individual who invests in startup companies.

On the other hand, the venture capitalist is a firm that seeks funds from surplus providers and makes the funds available as equity capital to businesses that need it. Especially businesses with growth potential.

READ ON  Revenue meaning and explanations

An Initial Public Offering (IPO) sold in a recognised stock exchange market. Holders of such offerings or shares are called shareholders. These sets of investors buy a portion of a company’s shares/equity capital with the hope of earning dividends and capital gains.

Equity capital is used to run a business. The capital provided is utilized for the growth of the entity. It is used for the daily running of the business such as purchases of goods, payments of wages and salaries among other things.

Time duration. There is no time period for this type of finance. The providers are willing to part with their money for as long as the business exists. It is only when the business fails that the owners and investors can redeem the money they invested.

Ads you may like

Risk. This type of capital is more risky. The investors may lose all or part of their investment when the business is filed for bankruptcy or liquidation.

READ ON  Key Errors that don't affect trial balance: Error of Principle

Reward. As a result of the high risk, equity capital holders receive higher returns on their investments.

Conclusion

Equity capital is the core fund of every business. A business without it is said to be using creditors money to do business (or levered). This may lead to the folding up of the entity.

2Shares
Ads you may like

Ads you may like