Equity = Assets - Liabilities
It is shown at the Liability side of the Balance sheet. And, it always carries a credit balance. At the same time, preparation of Financials Statements of Business, capital contribution by owners, and profits are written differently according to the formation of Business. If Business is in the form of Private Limited Company or Public Limited Company “Equity” is written. In the case of Partnership Firms and Proprietorships, it is written as “Capital”. The Equity of the Company consists of: Shareholder’s Equity and Reserves and Surplus (For Example, Profit and Loss Reserves, Security Premium Reserve, Capital Reserves, Retained Earnings, etc.) Every Owner of the business invests in his company for the expansion of the business. When a company requires more for expansion, it can bring equity on its own, or it can go to the Public for raising the money. People who invest in the company become Shareholders of the company. Shareholders of the company are also called as the Owners of the company as they have invested in companies like owners. And, as owner’s they share the Profit and Loss of the company also. In the balance sheet, it is written as “Shareholder’s Equity”. “Reserves and Surplus” is the second component of Equity. Reserves and Surplus is profit accumulated by the business for various purposes. All profit is allocated according to specific reserves. This is used for business in the future. This is also one of the components of Equity. If we are talking about the Equity of a Company, we are talking about the shareholders’ equity and Reserves and Surplus it has. The Equity can be Positive Equity, or it can be Negative Equity. Positive Equity means a company has sufficient Assets to repay its all Liabilities. Negative Equity means a company has Liabilities more than its Assets. Whenever there is negative equity, it does not give a good sign of the company’s growth.