Equity Vs Capital
Equity or Owner Equity or shareholder equity refers to the amount of money that the owner/shareholders have invested in the business. It represents the amount of asset which belong to the owner/shareholders. It is a part of the accounting equation that represents the Asset, Liability, and Equity.
Owner Equity can be increased after the business making a profit for a few years. The net profit from the income statement will be accumulated as the retain earning. This balance will be classified as part of the equity in the balance sheet. So if the company keeps making a profit more and more, the equity will keep increasing.
Besides the retained earning, equity includes other components such as capital, treasury stock, additional paid-in capital, and other reserves.
Equity = Asset – Liability
Capital is a part of equity, it represents the amount of investment that the owner/shareholder invests in the company. It does not include other balances such as retain earning, dividends, and other reserves. Capital is equal to or less than equity.
Capital will be increase by the capital injection made by the owner/shareholder when it is necessary. On the other hand, the capital will decrease when the owner withdraws the capital which is different from the dividend.
For example, base on Company A’s balance sheet, there are some components as the following:
- Capital: company’s owner has invested 80,000 since they start the business in 202X. One year later, they have invested an additional 20,000 to expand the business.
- Retain Earning: the company has made a total accumulated profit/loss of 50,000 over its lifetime.
- Other reserves: the balance raise due to property evaluation.
- During the year, management decided to withdraw a dividend of 10,000
Please calculate Capital and Equity.
Capital equal to initial investment plus additional capital, less any capital withdrawal. Base on the company’s financial statement, the owners have invested $ 100,000 in total and there is no withdraw.
Capital = 80,000 + 20,000
Equity = 100,000 + 50,000 + 5,000 – 10,000 = 145,000