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What is Equity?

Equity typically referred as shareholders' equity (for corporations) or owner’s equity (for sole proprietorships). It is the remaining value of an owner’s interest in a company minus all liabilities. Equity can be calculated as:

Equity = Assets – Liabilities

It increases when the owner makes a capital contribution or when the business has a profit, and It decreases when the owner takes money out or when the business has a loss. Equity represents the value that would be returned to a company’s shareholders if all the assets were liquidated, and all the company's debts were paid off.

What is equity on the Balance Sheet?

You can find the amount of shareholders’ equity in a business by looking at the balance sheet. On the left are assets (the value of what the business owns). On the right are liabilities (what is owed by the business) and Shareholders’ equity (what you get when you subtract liabilities from assets). Shareholders’ equity refers to the overall net worth of your business and represents the money belonging to shareholders, whether that is just you or numerous owners or investors. If the amount is negative, then the shareholders have no equity in the business, and the company is unprofitable. An analyst routinely compares the amount of equity to the debt stated on a balance sheet to see if a business is properly capitalized.

Other forms of Equities

The equity concept also refers to the different types of securities available that can provide an ownership interest in a corporation. In this context, equity refers to common stock and preferred stock.

Common stock: Common stock, sometimes called capital stock, is the standard ownership share of a corporation. For instance, if a company had 100 shares outstanding, one share would be equal to one percent ownership of the company.

Ruchi Joshi