Ownership Equity, Ownership Equity Accounting, Ownership Equity Assets

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Ownership Equity
In accounting terms, Ownership Equity is the remaining interest in all assets after all liabilities are paid. If valuations placed on assets do not exceed liabilities, negative equity exists.

At the start of a business, owners put some funding into the business to finance assets. Businesses can be considered for accounting purposes to be sums of liabilities and assets; this is the accounting equation.

After liabilities have been accounted for, the positive remainder is deemed the owner's interest in the business.

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Each account in the Anglo-Saxon chart is classified into one of the five main categories:
Assets, Liabilities, Equity, Income and Expenses.

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.

In accounting terms, Ownership Equity is the remaining interest in all assets after all liabilities are paid. If valuations placed on assets do not exceed liabilities, negative equity exists.

This definition is helpful when a business is not paying its bills and gets liquidated, wound up, put into receivership or bankruptcy. Then, a series of creditors, ranked in priority sequence, have the first claim on the proceeds (e.g. asset sales), and ownership equity is the last or residual claim against assets, paid only after all other creditors are paid.

In such a case, creditors may not get enough money to pay their bills, and nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital, liable capital and equity.

When the owners are shareholders, the interest can be called shareholders' equity; the accounting remains the same, although shareholders may allow different priority ranking among themselves by the use of share classes, and options. This complicates both analysis for stock valuation, and accounting.


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Equity Capital

Equity capital is defined as the amount of capital provided by the company's owner(s). Providing new equity (an "issuance" of new equity) gives the firm new capital and increases owners' equity by the same amount and time needed. An issuance of new shares, to raise new capital, increases shareholders' equity.

Formally, owners' equity is also a form of liability, but is deemed separate and different from other liabilities since it is a residual interest, ranked last in the series; equity is generally considered to be an asset.


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Market Value of Shares

In the stock market, market price per share does not correspond to the equity per share calculated in the accounting statements. Stock valuations, often much higher, are based on other considerations related to the business' operating cash-flow, profits and future prospects; some factors are derived from the accounting statements.

Thus, there is little or no correlation between the equity seen in financial statements and the stock valuation of the business.


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Real Estate Equity

Individuals can also use market valuations to calculate equity in real estate. An owner refers to his or her equity in a property as the difference between the market price of a property and the liability attached to the property (mortgage or home equity loan).

This is the exact opposite of how equity is considered for accounting purposes.


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Shareholders' Equity

Shareholders' Equity (or Stockholders' equity, Shareholders' Funds, Shareholders' capital employed) is ownership equity spread out among shareholders whose class of share may have special rights attached to it. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives.

In business accounting, it is the owners' interest in the assets of the enterprise after deducting all its liabilities. appears on the Balance Sheet, one of three Financial Statements. The book value of equity will increase if the firm's assets increase more than its liabilities.

For example, a firm making profits, receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit it is increasing its assets. Also, an issuance of new equity in which the firm obtains new capital increases the total shareholders' equity.

Equity will decrease, for example, when machinery depreciates, which is registered as a decline in the value of the asset, and on the liabilities side of the firm's balance sheet as a decrease in shareholders' equity.


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Share Repurchases

Another event that changes the shareholders' equity is an equity repurchase, in which a firm gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholders' equity.

For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares (increases the size of each share) in future income and distributions.

Dividends paid out to Preferred share owners are considered an expense to be subtracted from Net Income (from the point of view of the common share owners).

Assets and liabilities can change without any effect being measured in the Income Statement under certain circumstances; for example, changes in accounting rules may be applied retroactively. Sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value.

The individual investor is interested not only in the total changes to equity, but also in the increase/decrease in the value of his own personal share of the equity. This reconciliation of equity should be done both in total and on a 'per share' basis.

  • Equity (beg. of year)

  • + Net income

  • − Dividends

  • +/− Gain/Loss from changes to the number of shares outstanding

  • = Equity (end of year)

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Business Tips

Some tips on how to avoid business failure:

  • Don't underestimate the capital you need to start up the business.

  • Understand and keep control of your finances - income earned is not the same as cash in hand.

  • More volume does not automatically mean more profit - you need to get your pricing right.

  • Make sure you have good software for your business, software that provides you with a good reporting picture of all aspects of your business operations.


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Important Note
Because the material covered here and other pages is considered an introduction to the topic of Accountancy and Accounting, there are many complexities not presented. You should always consult with a business accounting professional for assistance with your own specific circumstances.


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