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Knowing how much equity is in your business is important because it helps you to monitor the health of your company and drive further growth.
Read on to find out the definition of equity in business, the different types of equity, and how to calculate equity in your accounting.
The equity meaning in business is the amount of money that could be returned to a company’s shareholders if all its assets were liquidated and debts paid off.
For small businesses, the shareholders are likely to be the owners, alongside anyone who has put money into the business in return for a stake, such as an angel investor.
A company’s equity is a good indicator of its financial health. It’s included on the balance sheet and is often used by potential investors to work out which companies they want to fund.
Also known as the company’s value on paper, equity is calculated by subtracting the value of a business’s assets (such as buildings and cash) from its liabilities (such as salaries and tax). The more equity a business has, the more valuable it is.
Here’s an overview of some of the different types of equity in business:
Selling equity can help you expand if you want hire more staff or rent new premises. To get funding, you’ll need to give away a share of your equity. For example, an investor may offer you £100,000 in exchange for 20 per cent of your business.
When you sell equity, your new shareholders will be entitled to the value of their share (assets minus liabilities) when they sell it, the business is sold, or goes into liquidation.
Here are some things you’ll need to do before selling equity:
Equity funding is another way of saying that you’re selling equity – giving away part of your business in exchange for a cash injection.
There are several types of equity funding, each with different advantages and disadvantages. Here are some of the most common:
Equity is used in accounting when preparing a balance sheet or other financial statements. It can be calculated by a professional accountant or by using accounting software.
Download our balance sheet template to find out what you need to include and how it can help you to monitor the financial performance of your business.
As we explained earlier, to work out the equity of your business you’ll need to subtract your assets from your liabilities. The equity of your business can be positive or negative.
For example, a business with positive equity has enough assets to cover its liabilities. On the other hand, a company with negative equity would have liabilities worth more than its assets.
If your assets (such as cash, stock, property, and prepaid expenses) add up to £300,000 and your liabilities (such as unearned revenue and money you owe for tax) add up to £150,000, your business has a positive equity of £150,000.
However, if your assets add up to £225,000 and your liabilities add up to £325,000, your business has a negative equity of £100,000.
Working out the equity of your company can be complicated, so make sure you speak to a professional accountant before you get started.
Do you have any unanswered questions about equity in business? Let us know in the comments below.
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