Characteristics of Equity

Characteristics of Equity

In this article we would explain some important characteristics of equity .we can define Equity as residual interest of Share holder in the company. In simplest term it is running balance of investment of shareholder.

Important Characteristics of Equity

Some important characteristics of equity have been briefly described below

1.   Running Balance of Investment:

Equity may be defined as running balance of shareholder investment. The technical name of running balance is residual interest i.e. remaining interest after all liabilities.

2.   Equity Changes:

Equity being the running balance of investment does not remain fixed, rather changes each financial year. Net income increases the equity, where a net loss reduces the equity. Thus performance of the company has direct linkage with equity.

It is important to remember that there are many factors which affect the equity like contribution, loss or profit on capital asset, foreign currency fluctuation.

3.   Equity Calculation:

Equity can be easily calculated from the statement of financial position. The formula for calculating the equity with simple formula paid up capital plus accumulated retained earnings & reserves. Another way of calculating the Equity is net asset method i.e. assets – liabilities.

4.   Equity Calculation Examples:

Equity can be calculated from the statement of financial position. If the company assets are 300 million and its liabilities are 200 million, then its equity would be 100 million i.e. asset minus liabilities.

5.   Items of Equity:

Typically following items form part of equity.

a.    Paid up capital.

b.    Retained earnings.

c.    Revaluation surplus.

d.    Share premium account.

e.    Changes in accounting policies.

f.     Correction of error.

g.    Other items directly recognized in equity.

6.   Statement in Changes in equity:

Statement in changes in equity shows or describes the changes occurred in the equity account during the financial year. There are many head of equity account and changes are shown in each head.

This statement in changes in equity is divided into three sections i.e. opening balance, changes occurred during the year and closing balances. A simple format of changes in equity statement is given below (only three heads are includes, there may be more heads).

	Share Capital	Retained Earning	Share premium	Total
Opening Balance	50,000	40,000	30,000	120,000
During Year	10,000	5,000	5,000	20,000
Closing Balance	60,000	45,000	35,000	140,000

List of important characteristics of equity:

Some important characteristics of equity are listed below

a.    Equity is running balance of investment.

b.    Equity can be calculated as net asset.

c.    Equity changes period to period.

d.    Income increases the equity, while an expense reduces equity.

e.    There are many items which are directly charged to equity.