What is equity in accounting?

Equity in the remaining interest in a company’s assets after deducting liabilities. It indicates the portion of assets that owners or shareholders can claim. Whether you’re an individual or a business owner, understanding equity is crucial for assessing financial health.

A solid financial foundation starts with a clear understanding of your finances. This article provides a straightforward explanation of what equity in accounting is, how it appears on the balance sheet, and its significance for both individuals and businesses.

Table of contents:

1. What does equity mean in accounting?
2. Where is equity on the balance sheet?
3. What is equity for individuals?
4. What is equity for business owners?
5. What is a good return on equity?
6. What is negative equity?
7. Manage your equity with Payt
8. Frequently asked questions about equity

What does equity mean in accounting?

Equity signifies the portion of assets that remains after all liabilities are settled. It’s calculated by subtracting total liabilities from total assets. This figure provides insight into the net worth of an individual or business.

For businesses, equity comprises contributed capital and retained earnings. For individuals, it includes assets like savings, property value exceeding mortgage obligations, and investments. Maintaining sufficient equity offers financial stability and resilience.

Where is equity on the balance sheet?

Equity is presented on the right-hand side of the balance sheet, typically under a separate section adjacent to liabilities.

Example balance sheet:

What is equity for individuals?

For individuals, equity refers to personal net worth: assets minus liabilities. This includes savings, property value exceeding mortgage balances, and investments. Understanding personal equity is essential for financial planning and assessing one’s financial position.

What is equity for business owners?

In the context of business, equity represents the owner’s claim on the company’s assets after liabilities are deducted. It’s a key indicator of financial health and sustainability.

What is equity in a sole proprietorship?

For sole proprietors, equity comprises the owner’s initial investment, additional contributions, and accumulated profits or losses. It’s directly tied to the owner’s personal finances.

What is equity for self-employed individuals?

Self-employed individuals often operate as sole proprietors, making their business equity synonymous with personal equity. It’s crucial to monitor this to ensure business viability and personal financial security.

What is a good return on equity?

Return on equity (ROE) measures a company’s profitability relative to its equity. It’s calculated as Net Income divided by Shareholder’s Equity. A good ROE varies by industry but generally falls between 10% and 15%.

What is negative equity?

Negative equity occurs when liabilities exceed assets, resulting in a negative net worth. For individuals, this might happen if a property’s market value falls below the outstanding mortgage. For businesses, it indicates financial distress and may signal insolvency risks.

Manage your equity with Payt

Effective equity management starts with robust accounts receivable processes. Payt offers solutions to streamline invoicing and collections, enhancing cash flow and financial stability.

Benefits of using Payt:

• Accelerated payments: Invoices are paid up to 30-50% faster.
• Time efficiency: Automate reminders and follow-ups, saving up to 80% of your time.
• Enhanced client relations: Clients can easily communicate and settle invoices through the portal.
• Control and customisation: Tailor communication strategies to fit your business needs.
• Certified security: ISO 27001 certified, ensuring data protection.
• Real-time insights: Monitor outstanding invoices and client interactions instantly.

Discover how Payt can support your financial management. Download our brochure or schedule a free demo today.

Frequently asked questions about equity