Equity Formula

The accounting equation is a fundamental concept in the world of finance, as it illustrates the relationship between equity, assets, and liabilities. This equation is expressed as: Equity = Assets - Liabilities.

Assets = Liabilities + Equity

Assets refer to anything that has value and is owned by an individual, a company, or an organization. Examples of assets include cash, investments, property, equipment, inventory, and accounts receivable. The assets equation is based on the principle that everything a company owns must be financed in some way, either through borrowing money (liabilities) or by using the company’s existing funds and resources (equity) or both.

Liabilities = Assets - Equity

Liabilities, on the other hand, represent the financial obligations a company or individual owes to others, such as loans, unpaid bills, and salaries payable. Since assets can be financed by both liabilities and equity, by subtracting equity from assets, we can determine the amount of assets that are considered a financial obligation and need to be repaid as a liability.

Equity = Assets - Liabilities

Equity, also known as net assets or owner's equity, is the residual value in the assets of a company that belongs to owners and is not owed to creditors. In simpler terms, equity is the value that remains once all debts and obligations have been fulfilled.

Variations of the formula:

Equity = Assets: This formula would mean that a company's total assets are entirely financed by equity, and there are no liabilities owed to creditors.

Assets = Liabilities: This formula would mean that a company has no equity financing, and all of its assets are financed by liabilities owed to creditors.

Liabilities = Equity: This formula would mean that a company has no assets and owes an equal amount to its creditors and owners.

By understanding the fundamental accounting equation, you can also gain insight into a company's financial position and the relationship between its resources, obligations, and the ownership stake.