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Equity in accounting refers to the sum of money that is returned or paid to the owners/shareholders at the time of winding up of the company once all of the assets are liquidated and the liabilities are paid off.
It is generally referred to as Shareholder’s equity or Owner’s equity. It can also be calculated with the help of a formula derived from the accounting equation which is as follows:
|EQUITY = TOTAL ASSETS – TOTAL LIABILITIES|
Treatment of equity in accounting
Equity is shown in the balance sheet under shareholder’s equity, which is a result of the difference between the total assets and total liabilities of the company. I would like to explain this concept further with the help of an example which is as follows;
The following is the balance sheet of XYZ Ltd. which shows their Equity, Liability, and Assets during the current financial year.
Balance sheet as of 31st March, YYYY
|EQUITY AND LIABILITIES|
|Reserves & Surplus||40,000|
|Short term borrowings||3,000|
|Short Term provision||3,000|
|Cash and bank balance||6,000|
NOTE: As mentioned earlier, equity represents the difference between the total assets and total liabilities which can be easily recognized in the balance sheet given above.
Total Assets = 1,66,000
Total Liabilities = 26,000
Equity = Total assets – Total liabilities
= 1,66,000 – 26,000