Equity in general is a nifty concept. Big businesses list it as an account upon each evaluation. Normally, you can view the company’s equity after each month. In its pure form, it shows how much of the company’s assets is owned by the shareholders.
It’s crucial to know about these things if you want to assess the company’s financial health or how valuable your stake in the company is.
With small businesses, however, it works differently. In particular, sole proprietorships don’t have shareholder’s equity. Instead, they compute the owner’s equity. It’s a similar thing, and yet different. It basically shows how much of your private business is owned by you.
Equity is an incredibly important account in accounting. It shows the value of a business owned by shareholders. As such, corporations and public companies of all sorts also call it a ‘shareholder’s equity’.
In short, if any public entity was to sell all their stuff and distribute them amongst owners, a portion received by the stockholders would be the equity of this company.
Equity is counted with 3 simple steps, including the calculation of:
- All value of assets owned by the company
- All value of liabilities (assets owed by the company to someone else)
- The liabilities subtracted from assets
The resulting number would be shareholder’s equity. You should count both total liabilities and assets because private companies are normally owned in full by shareholders, whoever they are. Liabilities are never left out. You can think of it as the total debt of the entity divided between all owners.
What of owner’s equity?
Owner’s (singular) equity represents the worth of a private business owned by its owner. It’s never applied to corporations because they have multiple owners. The concept is reserved for sole proprietorships (for the US) or similar types of private businesses in other countries.
It’s counted in a similar manner. No one invests in sole proprietorship businesses, so using it as an indicator of financial health would only be useful to the entity’s one owner.
Still, knowing your owner’s equity is important because it helps you evaluate your financesand determine how much ownership you truly have in your company.This sort of equity can be calculated in the same manner you’d calculate the equity of a bigger company.
Calculating owner’s equity
The owner’s equity is normally calculated by adding up all value pulled into the business and subtracting all value pulled out of the business.
The former includes investments by the owner, total income, and other monetary compensations. The latter includes debts, total losses, and other expenditures. Subtract one from the other, and you get your owner’s equity.
Reasons for calculation
This sort of equity is still good for assessing the financial well-being of the business. Just like with bigger entities, equities of solely-run projects can be negative or positive. The trend monitored over lengthy periods of time can tell you whether your business is doing fine or not, objectively.
Naturally, it’s not the only way of identifying it, nor is it the most accurate of indicators. But if you want to know a general picture fast, there’s no better way of getting it than to calculate the equity in the business.
The equity is negative when there are more liabilities and total losses than assets and total earnings. Obviously, if that’s the case, the business is not doing very well, even more so if this state of affairs continues for some time.
The equity is positive when there are more assets and total earnings than liabilities and total losses. It’s a natural trend, and if your business is in this condition for a while, then it’s healthy. The size of the difference obviously matters – both for positive and negative equities.