Equity (from Balance sheet)
Equity represents the residual amount of money of the youngest – meaning the newest – class of investors, after all liabilities are paid out. When the calculation is made, if the result is negative, which happens in case the liabilities are greater than the assets, equity is negative. If the calculation result is a positive number that means the assets is greater than the liabilities so the equity is positive. Shareholders’ equity represents the remaining funds when all liabilities are paid and then divided among all shareholders. It too can be positive or negative; when it is negative it is referred to as positive shareholders’ deficit.
Equity in Business
When starting a business, owners put some money as starting money for the company. This is treated as liability for the company, as company and its owners are separate entities. After a while, through doing business, company gains some assets. From a financial perspective, a company can be considered as the sum of its liabilities and assets. When the liabilities have been deducted from assets the remaining funds are the owner’s interest in the business.
Book value of equity changes with the changes in liability or assets. When firm’s liabilities go up or down so does the equity change – the bigger the liabilities, the smaller the equity and vice versa – the smaller the liability the bigger will equity balance be. When the company sells its products for more money than they spend making them, that means the assets are bigger than the liability, and so is equity greater. When machinery depreciates, this is registered as lowering the assets, making equity smaller. When a firm receives new equity capital, it is represented as raise in company’s assets, making the equity larger.
Share repurchases are another way of rising equity. By repurchasing some of the shareholders shares, the number of shares as a whole reduces, thus making each share more valuable, which makes future equity payments greater for a singular shareholder. Paying dividends is deducted from equity and paid by cash. In some ways, equities can become smaller retroactively, by applying accounting rules retroactively, or by translating assets which were held back in other countries to home currency at a different rate, thus losing value. This is a way to lose equity without liabilities actually getting bigger or by reducing asset size.