Equity Definition – Equity Formula and Example

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Equity Definition and Example

Equity Definition – “The value of a company’s assets minus its liabilities. On a balance sheet, equity is referred to as shareholders’ equity or owners’ equity”.

In simple words, equity is the capital investment made on the part of owner in the business. In addition to this, it also refers the securities that provides ownership claim to the investors in a corporation. Overall it refers to owner’s share in the business as well as the common or preferred stocks. Moreover, it appears in the Balance Sheet under Shareholder’s Equity head.

Equity Formula

Equity = Total Assets – Liabilities

Components of Equity/ Shareholder’s Equity

Here are the components of equity in order to understand equity definition better.

Outstanding Shares – These are the shares that a company has issued and right now are floating in the market. These are the shares purchased by the investors and are not buy back by the organisation.

Additional Paid – in Capital –  It is the amount above the par value of the share paid by the investors. For example ABC company issued 1000 shares with par value Rs 10 @12. So, the extra 2,000 is the additional paid – up capital.

Retained Earnings – It is portion of net profit retain by the company for reinvesting in the future. When organisation retains money, it does not provide dividend to its shareholders.

Treasury Stock – It is the amount of shares which represents those stocks which are repurchased from the investors by the company.

Related Financial Terms of Equity

Importance of Equity – Why Equity is Used?

Equity shareholders have the ownership right over the corporation. They possess the voting rights in the important decision of the business. Though other shareholders are also the owners of the company. But they do not have any voting right in the management. Also it represents the stake of one’s claim in the company. Equity holder cannot claim more than that.

In addition to this, if management needs finance they issue equity share. However, it results in dilution of the ownership of the existing owners. So a proper balance should be maintain while issuing equity kind of securities.

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