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What Is Equity?

Equity refers to the amount of money that is usually returned to the shareholders in a company if its assets are sold off, and the debts are paid off. As such, the value that is due to be returned in the event of liquidation of assets or clearing a company’s debts represents the residual ownership in a firm or an asset by shareholders after all debts attached to the asset have been cleared off.

Deeper Definition

Usually, equity can be viewed from two standpoints: the book value and the market value. The book value is the difference between assets and liabilities in the organization’s balance sheet. Investors or experts determine the market value of equity in arriving at correct valuations. In the case of the book value of equity, it is possible to obtain it as a function of the net income, dividends, share capital, contributed surplus, etc. The definitions of assets and liabilities have to be all-inclusive for proper valuation. It is significant that the accountants or financial experts track all the raised sums and re-purchased sums/share capital and the retained earnings found by subtracting cumulative dividends from the cumulative net income. The market value factors the latest share prices and multiplies it by the total number of outstanding shares. For individuals, all personal assets, including real estate, cash, investments, and liabilities like mortgages, credit card debt, lines of credit, etc., are considered with the personal net worth being arrived at by the difference between assets and liabilities.

Shareholder Equity Example

In arriving at the shareholder equity for an organization, e.g., Luthor Corporation, for the year-end financial statement for 2020, important figures detailing the assets and liabilities are crucial in making the estimates. Given the following:

—– Total Assets= $100,000

—– Total Liabilities= $55,000

—– Total Equity= $45,000.

The accounting equation holds that Equity= Total assets – Total liabilities takes effect, and the equity is $45,000.

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