Definition of Equity: Types, Elements, and Steps to Calculate

Equity is – For shareholders in a company, equity is a familiar term. How not, this term is one of the consideration factors that is often used by someone when they want to invest in a company.

To find out more about equity or equity, then you can see this article. In this article, we will explain about equity, starting from its definition, types, elements, and how it works. So, read this article to the end, Sinaumed’s.

Pengertian Equity

Equity is the amount of rights or interests of the owner or an entity in the assets of a company. If you then remember the accounting equation, it is known that the left side is used as a marker of assets while the right side is debt and equity.

The left side shows the amount of resources owned by each company, while the right side shows the interest of creditors and owners of a company’s assets.

The term equity itself comes from the word equity which means the company’s net worth. So, in principle equity is net worth obtained from the funding of a company owner and from the results of a managed business activity.

According to the Statement of Financial Accounting Standards (PSAK) of 2002 Article 49, the notion of equity is the residual right to the company’s assets after deducting all liabilities. Equity = Assets (Assets) – Liabilities (Debt).

Equity or equity is also a formulation of total assets minus total liabilities. Equity itself is part of the owner’s rights in a company, namely the difference between existing assets and liabilities. However, equity cannot be sold and also has no measure of the sale value of a company. In addition, equity itself comes from funding from owners and the results of the company’s operations.

Equity will also then be reduced by the withdrawal of participation by the owner, sharing of benefits due to losses. In simple terms, equity is an estimate that reflects the magnitude of the rights and interests of company owners in company assets.

Now, after knowing the brief definition of equity, the next discussion will be the type of equity.

Jenis Equity

According to the Corporate Finance Institute , there are two types of equity that are most commonly used, namely book value and market value. How to calculate both are also different. For book value equity, the way to calculate it is to reduce assets with expenses or liabilities (related to existing accounts payable), you can also increase capital with saved income.

Meanwhile, the market value itself can then be calculated by adding the share price to the number of existing shares.

However, there are several other types of equity. which are not only related to shareholders and companies invested. The following are several types of equity and their explanations.

1. Home Equity

Home equity is the value of the home minus the amount owed on the mortgage. Well, this mortgage itself is a statement of debt on credit given to buy a house. For example, if you want to buy a house with a bank loan.

So, if the amount of money borrowed exceeds the selling price of the house, then the equity value of the house becomes negative. However, if what happens is the opposite, it means positive. This in itself is very important to consider, so you can get a good profit when selling or buying it.

2. Business Owner’s Equity

When opening a business, someone must have initial capital. Equity this one is a value of the capital. Capital that does not enter into any calculations and all kinds of profits that go from there will go to the business owner himself.

3. Shareholder Equity

Furthermore, shareholder equity is practically the same as that of business owners. In this case, the difference is in the value of the dividend which is then owned by the business owner and will be shared with the shareholders. This can happen because this dividend is a result of investment from the capital that was issued at the beginning.

4. Equity Financing

Finally, there is equity financing. This type of equity will then be created when the company is successful in running a business, but does not make a profit. Well, shares or ownership in the business will then be sold to investors and the proceeds from the sale will be used to develop the company.

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Elements of Equity in the Company

Equity itself consists of several elements. The following are the elements of equity along with their explanations.

1. Paid-up capital

One element that is often found in equity is paid-up capital. This term then refers to the amount of money invested by a company owner as a shareholder in the company.

This type of capital will then be further divided into two parts, namely share capital, or the number of applicable share values. Then, agio or share disagio, namely the difference in the value of the deposit from the shareholder with the total value of the shares. If this difference then has a positive value, then it is also called agio. If this difference is negative, it is called a disagio.

2. Unshared Profits

The next element in the company’s equity is profits that cannot be shared. This element is also known as retained earnings. It is also the result of net operating profit that is not taken by a shareholder.

The decision to share or withhold these profits will then be taken by the company owners. For example, in a publicly listed company, the decision to distribute or save profits is then made through a GMS or at a General Meeting of Shareholders.

3. Capital from Revaluation

Furthermore, according to Chron’s website, the element contained in the company’s equity is capital from revaluation. In practice, each company will then apply a recalculation process to the value of all the assets they own. If later during this recalculation process there is an adjustment to the value of assets, then the difference will change the company’s balance sheet. This is what then becomes the initial capital of a reassessment.

For example, a company that has assets in the form of a plot of land. Then, when there is a reassessment process, the price of this land will increase. So, this difference in value will then be formed because of this price increase which will become the capital of the revaluation.

4. Capital from Donations

The last form of element contained in the company’s equity is the capital obtained from donations or grants. All forms of adding to the value of assets after these liabilities or obligations will then be realized as equity values. This also includes when the company obtains capital from donations. Grant capital or self-donation is an additional capital that applies when the company experiences additional assets without making any expenditures.

Steps to Calculate Equity

Now you need to understand how to calculate this equity. As you know from the discussion above that the type of equity can be everywhere, depending on who uses it. However, now equity calculations are very easy to do because they usually use the same formula, namely:

Equity = Assets – Debt.

Whether it’s equity in the purchase of shares by shareholders, equity in the initial capital of a business actor, equity which is then obtained by a company from shares sold in the public, and so on, it must use a formula above. Assets are the capital that you have, then reduced by the debts that you do to support your business activities.

For example, when a company gets capital from buying shares worth IDR 100 billion. To find out how much the equity value is, this capital will be reduced by the company’s debt of IDR 7 billion.

Equity = Assets – Debt Equity
100 billion – 7 billion Equity = 93 billion

So, the company’s equity value from the sale of its shares is IDR 93 billion.

How it Works Equity

However, equity is then used for various things. Indeed, the end will end with the conclusion that equity is the sum of inventory, assets, and net income. Quoted from The Balance Small Business , below is how equity works in various forms:

1. Shares

Investors generally then own equity in a company in the form of shares (either in common or preferred stock). Equity ownership in a company also means that business owners will share ownership with investors, commonly referred to as shareholders. If someone has shares in a company that has not gone public, then the name of the equity owned then becomes private equity.

2. Balance sheet

In the balance sheet, the way to see total equity is by looking at the number of ordinary shares, preferred shares, paid-up capital and retained earnings. This equity is also referred to as shareholders’ equity, then it will describe the amount of equity owned by business owners.

3. Liquidation

If your business is going bankrupt and has to liquidate, then the business owner’s equity is the amount of money left after paying off debts and selling all assets owned. If a financial situation is in a bad state, it could be that after it is disbursed, there will be no equity left.

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4. Intangible equity

When calculating equity, the assets that are included in the calculation are tangible or intangible assets. Tangible assets include inventory of owned facilities and property. On the other hand, examples of intangible assets are the reputation of the company, its brand identity and intellectual property rights. Even though it is not visible, these assets will then greatly affect the value of a company.

From all the discussion above, it can be said that equity is an accounting calculation that cannot be released when you want to make an investment. This is the discussion on equity or equity, starting from its meaning to how it works. Hopefully all the discussion above can be useful as well as add to your insight.

Recommended Books Related to Equity

1. Accounting for Assets, Liabilities & Equity

This book as a whole will review the accounting for assets, liabilities and equity items. The topics that will be discussed in detail and depth are accounting for cash, receivables, inventories (including cost of goods sold), investments in debt securities and equity securities, fixed assets (investments in non-current operating assets), current liabilities, bonds payable (financing long-term debt), and corporate accounting (shareholders’ equity).

This book is very appropriate to read (own) as reference material for the general public, practitioners, as well as students in accounting and management study programs who are taking introductory intermediate accounting and financial accounting courses. This book can be used as a practice reference for accounting executives who are involved in the financial reporting process or other general public who are interested in learning or getting to know accounting.

2. Young Billionaire Shares

Are you looking for a step-by-step guide to becoming a successful full time investor? Have you been in the capital market for a long time but haven’t been able to generate consistent profits? How do you build passive income from investing in stocks? Is it possible to achieve financial freedom by investing in stocks? Why does stock trading actually make you lose money?

This book will answer all the above questions and provide proven solutions. It will also show why young people have great opportunities and resources to achieve financial success by leveraging the stock market.

3. Cost Accounting Accountant

Book by Drs. Harnanto, M. Soc. Sc., Is a textbook that is simple, concise, yet fully discloses the collection of production cost data and the determination of the cost of products based on the historical cost system; which is absolutely necessary to be used as a basis for evaluating inventory of products in process and finished products in accordance with standards or Generally Accepted Accounting Principles (PABU) at manufacturing company lines.

This book is written using jargon and a straightforward style, so that ordinary people can easily understand its contents. This book explains everything related to measurement, systems and procedures for collecting and recording production cost data and determining or calculating the cost of products based on a historical cost system. The discussion in this book covers the collection of data on material costs, labor costs, and factory overhead costs; both according to the cost of orders method and the cost of processes in the historical cost system, including the various issues that surround it such as: damaged products, defective products and leftover materials.

This book also provides realistic case examples that are easy to understand. With content or discussion material that is quite comprehensive, it is no doubt that this book is very useful for practitioners (public accountants, management accountants, production managers, financial managers), and students of diploma programs, undergraduate programs taking accounting courses in particular .

4. Accurate Costing with Microsoft Excel

Are you confused about how to calculate the cost of goods sold? Starting from allocating the costs one by one and then putting them into cost items. It’s really hard huh? Now you don’t have to worry anymore! This book will answer all your questions starting from: What is cost, Easy cost allocation with excel, Calculation of depreciation and allocation to cost of goods sold.

Integrating all costs into cost of goods sold You will also get information about real costing calculations that can be applied immediately. Everything is done with the help of Microsoft Excel which makes your work easier and can produce accurate, fast and precise costing.

If you want to find books on accounting, then you can get them at sinaumedia.com . To support Sinaumed’s in adding insight, sinaumedia always provides quality and original books so that Sinaumed’s has #MoreWithReading information.