For businesses, when operating, there is a certain amount of capital. Capital is mobilized from many different sources and has different characteristics and uses. In which equity is used to maintain the operation of the business. So what is equity ? In the content of the article below will help you answer questions and information related to equity.
What is Equity?
Equity, Owner's Equity or Stockhold's Equity, also known as net assets, is known as capital owned by business owners and members in joint ventures or shareholders in the company. joint stock companies. The owners contribute capital to jointly conduct a production and business activity. And jointly share the profits generated from these activities of the business. As well as bear the same losses if the business is not profitable.
What is equity?
Equity is shown on the balance sheet of the company or business. It has become a common data used by analysts to assess the financial position of a business.
Equity is one of the regular sources of funding in a business. It is the capital that represents the amount that will be returned to the shareholders of the business in the event that all assets are liquidated. And all debts of the business have been paid off.
Especially equity represents the investors. Therefore, those who contribute large capital will have high benefits and power. The owners can withdraw money from the business plus the net from when the business is profitable.
Therefore, it is best to stay informed and understand what equity is. That way it will help you to run your business more efficiently.
Meaning of equity
Equity will often show numbers and the rising or falling scenarios of the types of funds owned by the company's head and by many others invested in it. In the case of equity funds, which are jointly contributed by owners and investors, or supplemented through resale processes, on that basis, equity is simply a commodity. in debt. Each company can usually have one or more sources of equity.
The owner's equity of the business through the operation process, the profits or losses are likely to change the capital because part of the profits will be reinvested when doing business, so the percentage will be reduced. equity capital down. When a company launches new shares, charter capital surpluses are likely to arise and affect the original owner's investment capital. In addition to having to convert convertible bonds into shares or in other words, making liabilities converted into capital assets, the equity of the business will always increase.
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How to calculate equity (Equity) by formula?
After understanding what is equity concept. To be able to calculate equity, you need to define clear information about some assets as follows:
- Based on the company's balance sheet, the enterprise to determine the total assets of the company.
- Determine liabilities.
The calculation of equity is extremely simple. However, to be effective, you need to know the calculation formula. Thus, the calculation of equity will not have errors. Especially in the calculation process you need to pay attention to the numbers. Because just entering a wrong number can lead to unpredictable consequences as well as damage.
What is the formula for calculating equity?
The formula for calculating equity will include 3 factors and these factors will be specifically formulated as:
Equity = assets – liabilities
In which assets will be counted, including many different items. As long as all things that can be converted into money can be used such as land, houses, goods, other incomes, etc.
Equity can be negative if liabilities are larger than total assets. For a company or business in the process of liquidation, equity is the remainder after the debts have been paid.
What does equity include?
What does equity include is a question that many people wonder. Currently, equity is divided into the following basic categories:
Owner's investment capital
This is the capital contributed by investors and owners. This source of capital can be personal or institutional capital. This is the actual capital of each shareholder and it will be regulated based on the charter of each enterprise. Owner's invested capital will be contributed and recognized based on the share price.
Capital from the profit of business activities
Every year, enterprises will earn profits from production and business. This profit will be added to the owner's equity in accordance with the enterprise's regulations. This means that the more profitable the business is, the more capital contributors have an increasing amount of equity.
What types of equity are there?
Asset Appraisal Spread
Equity may also be present if there is a difference in asset valuation. Owner's equity also helps to reflect on the difference due to the assessment of existing assets in the business, such as real estate, inventory, the value of houses and land of that business, etc.
Capital from other sources
In addition to the above owned capital, some companies and businesses also apply many other forms of capital calling. Including treasury shares is the value of shares repurchased by the enterprise. This value includes the share price at the time of acquisition and all related costs. Capital for capital construction investment, non-business funding, etc.
It can be said that investment capital and profit from business activities are the two sources that account for the highest proportion in the equity structure. The difference between assessment of assets and other sources accounts for a relatively small proportion in the equity structure.
Hopefully, the above information can help you to understand what equity is. As well as the calculation and types of investment capital. From there, it helps you to identify and choose the organizational structure of your business. In order to find the source of equity capital and bring the expected business results.
When does equity increase and decrease and what does it reflect?
Decrease in equity
Equity can be said to be the capital source of a business. The decrease in equity capital has a significant impact on the company's performance. When equity decreases, it will lead to a decrease in the amount of investment capital of the enterprise, the ability to turn capital and investment of the enterprise for business activities and production expansion will also decrease. If the situation is not rectified, the business will quickly shrink in size.
In that case, if the enterprise wants to expand the market, invest in production and business, the enterprise is required to take out a loan. If the owner's equity decreases continuously and the business has no way to overcome it, the amount of debt will increase, leading to financial imbalance and the risk of bankruptcy. A decrease in equity indicates that the business is having trouble in business.
Circumstances that cause equity to decrease include:
- Businesses need to return capital to owners.
- Shares sold for less than par value.
- The business ceases to operate.
- Payment of losses for business operations.
- (For joint stock companies) Cancel treasury shares.
Equity increased
One of the cases that causes equity to increase is to use profits from business activities to supplement. Enterprises can use the increased equity capital to rebuild in the investment, development and expansion of the company. Shareholders also require the business to extract a portion of profits from the business to pay dividends .
Equity increases in the following cases:
- Owner contributes additional capital;
- Supplementing capital from business profits of the enterprise, from funds belonging to owners' capital;
- Shares issued are higher than par value;
- Value of gifts, sponsorships, donations minus payable tax is positive and permitted by authorities to record increase in equity.
When does equity increase or decrease?
Distinguish between equity and charter capital
- Charter capital is the capital source stated on the business license.
- Equity is the total remaining assets after deducting liabilities.
| Characteristics | Authorized capital | Equity |
| Nature | Initial assets are spent by the founding members. | Assets obtained in the course of business belong to the owner of the business |
| Owner | Individuals or organizations (commitment to contribute) | Individuals, organizations, and governments that have shares in an enterprise |
| Formation mechanism | In a certain time | Stocks, which can increase or decrease over time |
| Place of show | Company rules | Business performance report |
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