What is Equity? Meaning, Features, and More.

हिन्दी में पढ़ें:

The term equity is much broader than we think, as it has different meanings in different field, for now, we are talking about equity in the accounting field.

In accounting, we often hear about the term equity, especially when talking about a company, and even when looking at the balance sheet of a company, we see the word equity, this is because the word equity is used to represent the owner’s share in the company. Note that different words can be used to represent the owner’s share in different forms of business, such as sole proprietorship, partnership firm, etc. the word capital is used in business, although all of them mean almost the same thing.

Equity represents the owner’s share in the business, which is shown on the liability side of the balance sheet. The reason for showing it on the liability side of the balance sheet is the separate legal entity concept, according to which the business and its owner are different persons, and whatever investment the owner makes in the business will become a liability for the business.

What is Equity?

Equity is the owner’s share in the business, and it is shown on the liability side of the balance sheet. If we look at it according to the accounting equation, it will be like this: Equity = Assets – Liabilities. In simple words, if we subtract all the liabilities from the assets, then the positive amount that remains is called equity. The higher the equity in any business, the better the condition of the business can be because it reflects the financial condition of the business.

Equity Formula

Equity is calculated mainly in two ways: one is the book value method, and the other is the market value method. Both methods have their own features. The value of equity may be different in both methods. The book value of equity can be found through the balance sheet, or it can be calculated by subtracting liabilities from assets (Equity = Assets – Liabilities), and the market value of equity can be found by multiplying the share price by the current share price (Market value = Share price x Shares outstanding).

Features of Equity

Following are the features of equity:

1. Owner’s Share:

Equity is the owner’s share in the business, and it represents the owner’s share in the business and it is shown on the balance sheet. Its value changes from time to time as it is affected by various factors, and the owner’s share in the business also changes due to the change in its value. A business in which equity is more than liabilities is considered financially stable and strong, as it protects the business from insolvency or bankruptcy, but it may not be so.

2. Liability for Business:

Equity is a liability for the business because accounting follows separate legal entity concept, and according to it both the business and its owner are two different persons, and their accounts are maintained separately and whenever the owner invests capital in the business it becomes a liability for the business and the business is liable to settle it.

3. Classified:

Equity is classified into various parts according to their nature, but mainly it is classified into two parts: one is book value, and the other is market value. The book value of equity is calculated through the accounting books maintained in the business, and it is shown in the balance sheet, and the market value of equity is calculated through the current market value, which depends on various factors.

4. Recorded in the Books:

Equity is recorded in accounting books, such as ledger account, balance sheet, etc. In the balance sheet, it is recorded on the liability side. It is recorded on the liability side because it is a liability for the business, and it is shown on the balance sheet, or it is called a liability for the business until the business pays it or settles it.

5. Fluctuating:

The value of equity is not always the same, as it is affected by various factors. For example, the book value of equity is affected by the number and nature of transactions taking place in the business, and the market value is affected by market conditions, forecasts, number of buyers or demand and supply, etc.

Read Also:

• What is Accountancy? Meaning, Features, and More.
• What is Accounting? Meaning, Features, and More.
• What is Book-keeping? Meaning, Features, and More.
• What are Assets? Meaning, Features, and More.
• What is Liability? Meaning, Features, and More.
• What is business? Meaning, features, and more.
• What is the Company? Meaning, Features and More.

QNA/FAQ