What Does Equity Mean?
Written by Eddy Hood
One of the many questions that you might find yourself asking about your company's finances is "What does equity mean?" When you ask "What does equity mean?" what you are really asking about is the value of your investment in your business. Equity is the amount of assets you have invested in the business minus all of the company's liabilities. These assets can be cash, stocks, or other types of funding or securities. The amount of owner's equity you have in a business should be recorded in an equity account. The purpose of equity accounts is to record the monetary value of the original assets that you have invested in the business, as well as the yearly or annual profits that you have subsequently invested in the company. Equity accounts also record the total annual list of your draws, which is basically defined as the money that comes out of the company's assets to pay the owner. By keeping track of the company's assets and liabilities, an equity account essentially reflects the net worth of your business. In the world of accounting, the owner's equity is defined as the total investment that the owner or owners have made in the business.
Equity accounts come in four basic types, including capital, withdrawals, revenues, and expenses. Capital accounts refer to the investments that the owner or owners made at the formation of the company. Because they count as contributions, they are always listed as positive (credit) balances. Examples of capital accounts include initial start-up investments as well as buy-ins by future business partners. Revenue accounts are credit-based balances which increase equity. This is because they are assets received by the organization or which are owed to the company. Examples of revenue include any sales the company makes. On the other hand, withdrawals are always negative (debit) balances because they represent assets taken out of the company, particularly to pay the owners. They are counted against equity accounts. Expense accounts are debit balances and they reduce equity because they are the expenditures that the company makes in order to produce profits or revenue. Examples of expenses include the electric bill and the cost of renting office space.
When it comes to managing equity accounts, Ignite Spot is here to help. Our outsourced financial services go far beyond mere financial calculations to include bookkeeping, accounting, bank reconciliations, accounts payable management, profit coaching, and other valuable online services that allow you to concentrate on your company's core business. When you hire us to manage your equity accounts, you'll find that each of our team members is a certified expert in bookkeeping. In addition, we have a passion for helping businesses become profitable and stay up to date with their financial situation. Whether you're running a small business worth half a million or a mid-sized firm, we at Ignite Spot can help you untangle your finances and manage your assets and liabilities with financial reports that are on time, accurate, and reliable. For more information on how we can manage your equity accounts, download our pricing PDF file and contact us today.