Equity can several meaning, one of which is the capital stock of a company. However, it may also refer to the difference between the assets and liabilities owed. Known as “owner’s equity,” it’s a common element used in business accounting. In fact, it’s one of the four primary types of financial statements, attesting to its importance. To learn more about owner’s equity and how it works, keep reading.
Owner’s equity — when used in the context of business accounting — is the net assets of a business. To calculate net assets, you must subtract your total liabilities from your total assets. If you own $50,000 in assets and have $20,000 in liabilities, for instance, your net assets and owner’s equity is approximately $30,000. Of course, this is just a basic example of owner’s equity. Most business owners will have deeper and more complex calculations.
Some people assume that assets only refers to cash. While cash can certainly be an asset, there are other types of assets — and all of these assets are used to calculate owner’s equity. Assets may consist of both tangible and intangible assets, for instance. See below for a list of common business assets.
Here’s a short list of some of the most common types of assets owned by a business:
- Common stock
- Preferred stock
- Retained earnings
- Brand names
- Real estate
- Treasury stock
It’s important to note that the book value of equity may change in certain circumstances. Issuing new equity, for instance, may increase equity for shareholders. Dividends paid to preferred stock are considered an expense and therefore must be subtracted from net income, which can also change the book value of equity.
Hopefully, this gives you a better understanding of owner’s equity in business accounting. To recap, it’s the net assets of a business. Owner’s equity is calculated by subtracting total liabilities from total assets. And as you can see from the information above, there are many types of assets, including both tangible and intangible assets. All business owners should closely monitor their owner’s equity to better determine the overall financial health of their organization. When owner’s equity begins to drop or even goes negative, it’s usually a sign of poor financial health, in which case changes should be made to reverse the trend.
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