What is owner’s equity? How is equity capital of the business?

The capital structure of each enterprise is classified into two categories: debt capital and equity. So what is equity and what is the source of the enterprise’s equity?

What is Owner’s Equity?

Owner’s Equity are sources of capital owned by business owners and members of joint ventures or shareholders in joint stock companies.

The owners contribute capital to jointly carry out a production and business activity and share the profits generated from these activities of the enterprise and also incur losses if the business is not profitable.

Equity is one of the regular funding sources in businesses. Only when the unit stops working or goes bankrupt, then the unit must use the property of the unit, first of all to pay the creditors first, then the remaining assets will be divided among the owners in billions their contributed capital.

Simply put, equity will be equal to the total assets of the business minus liabilities.

owners-equity

Equity is shown in detail in the report on business results of the enterprise. As shown above, you can see that Vinamilk’s equity includes the sum of the following values:

  • Equity
  • Treasury stock value
  • Currency conversion difference
  • Development Fund
  • Undistributed after-tax profit
  • Non-controlling interests

See also: What is an IPO? All important knowledge about IPO

Distinguishing owner’s equity and charter capital

Charter capital means the amount of capital contributed or committed to contribute by members or shareholders for a certain period of time and is stated in the company’s charter. Contributed capital here can be money, foreign currency, land use right value, intellectual property rights, business know-how, technology or other assets Charter capital is the basis for the company to distribute profits. as risks to capital contributors in the company

Charter capital and contributed capital are different from each other:

Characteristics Chartered capital Equity
Nature An asset that members bring into the company to become owner of that company. Is the property that a member, after becoming the owner of the company, acquired during the operation of the business.
Owner Charter capital contributed or committed to contribute by individuals, organizations to establish a business. Equity may belong to the State, individuals, capital contributing organizations or individuals, organizations holding shares of that enterprise.
Forming mechanism The charter capital is formed based on the main source of contribution or commitment to contribute capital by individuals, organizations in a certain time. Is formed as a source of capital invested by the State, enterprises and individuals annually contribute shares and increase or decrease annually from the company’s profit.
Place of instance Company charter Report business results for each period

What does equity include?

The presence of equity is often seen in corporate income statements in the following formats:

  • Stockholders equity
  • Surplus equity
  • Treasury shares
  • Undistributed interest
  • Financial provision fund
  • Bonus and welfare
  • Development Fund
  • Financial provision fund
  • Other equity funds …

what-is-owners-equity

Of the above sources, the share premium and treasury stock only apply to joint stock companies

  • Share premium: this is the difference between the par value of the share and the issue price of shares, the difference between the price of repurchase and reissue price of treasury shares. For example, the par value of company A’s shares is 20 PHP. The market price of company A’s stock is 40 PHP. Company A issues 15,000 shares to the market. Share premium = 15,000 * 40 – 15,000 * 20 = 300.000 PHP.
  • Treasury shares: When a joint-stock company repurchases its own shares and does not cancel such shares, these shares will be considered treasury shares.

When does equity increase and decrease?

An enterprise is allowed to account for increase or decrease in equity in the following cases:

Equity decreased

  • Equity decreases in the following cases:
  • Enterprises must repay contributed capital to capital owners;
  • Issued shares lower than par value;
  • The enterprise dissolves or terminates its operation;
  • Must offset losses for business activities according to regulations of competent authorities;
  • Cancellation of treasury stocks (for joint stock companies).

Equity increased

  • The owner contributes more capital
  • Additional capital from the business profit of the business, from the owner’s equity
  • Issued shares are higher than their par value
  • The value of gifts, sponsorships or gifts minus tax payable is positive and allowed to be recorded as increase in equity

Owner’s equity source

With different types of businesses, equity is also formed from different sources. In Philippines today, there are the following types of equity:

  • For state-owned enterprises: Equity is the working capital allocated or invested by the State. Therefore, the owner of capital is the state.
  • For a limited liability company (LLC): capital is formed by the members participating in the establishment of the company. Therefore, these members are the owners of capital.
  • For a joint stock company: Equity is the capital formed from the shareholders. Therefore, the owners of capital here are the shareholders.
  • For a partnership: Capital is contributed by the members participating in the company establishment. These members are the owners of the capital. A partnership means an enterprise that must have at least two general partners and may have capital contributors.
  • For private enterprises: The capital of the business is contributed by the business owner. Therefore, the owner of capital is naturally the business owner. The owner of a private business is liable with all his assets.
  • For joint venture enterprises (which may include joint ventures or joint ventures): Joint ventures may be conducted between domestic firms or domestic firms and foreign firms. . So what is equity?

In this case, equity is contributed by capital contributors who are organizations, individuals … Therefore, owners are members participating in the joint venture capital contribution. Each business will often mobilize capital from many different sources, so there may also be one or more capital owners and this capital is used throughout the life of the business.

owners-quity-source

In addition, in the course of business, the equity capital of the business can be supplemented from the business profits earned, the difference between the revaluation of assets or the funds of the business …

Therefore, the equity capital of a business can often also be supplemented through the investor’s contribution to new establishment or business expansion. The capital owner can be the state, the individual or organization contributing capital, and the shareholders can also buy and hold shares.

Depending on the type and specific characteristics of each business, the equity structure also changes.

Owner’s Equity calculation

In accounting, equity is the difference between the value of assets and the value of the debts of a business or a certain entity. It is adjusted according to the following equation:

Equity = Total assets – Liabilities

Example: You buy a home worth $ 20,000 (an asset), but have a loan of $ 5,000 for it (liabilities). It turns out that the house represents the $ 15,000 of equity the homeowner owns.

Full equity can be negative if the liabilities exceed the assets. For a company in the liquidation process, equity is what is left over after all its debts have been paid.

Equity is thus a prerequisite for businesses to operate and operate normally. Understand “What is Equity?” and accurately determining the value of Equity will help businesses operate more efficiently.

See also: What is weighted average cost of capital (WACC)? Formula of WACC

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