Learn the basics of equity accounts in the UK including book and market value to establish your company’s value and how to monitor equity on the balance sheet.
Equity Definition
Equity in accounting is used in two different ways.
There is equity in accounting that refers to the book value (market value) of a company. This is the difference between the assets and liabilities on the balance sheet.
Then there is owner’s equity which is the value an owner of a company has after the liabilities of the business are deducted.
Book Value of Equity
To calculate a book value of equity in accounting, you take the assets minus liabilities to get the equity value:
(Equity = Assets – Liabilities)
The equity value is used for preparing financial statements and balance sheets. But first, let’s take a look at a company’s assets and liabilities.
The asset value is adding noncurrent and current assets, including
Intangible assets:
- Goodwill
- Brand recognition
- Trademarks
- Copyrights
- Patents
- Customer lists
Tangible assets:
- Furniture
- Supplies
- Buildings
- Accounts Receivable
- Property
- Equipment
- Cash
- Stocks and bonds
- Land
- Inventory
Now, when it comes to calculating liability values, you need to add all the current and non-current liabilities, including:
- Warranties
- Accrued taxes
- Accrued wages and salaries
- Mortgages
- Unearned revenues
- Accounts payable
- Interest payable
- Loans
- Credit cards payable
To get to a company’s book value, you need to track and include all the liabilities and assets a company owns. As well as things like retained earnings and share capital. So be sure you’ve got all the data available.
Market Value of Equity in Accounting
The market value of equity in accounting can give a drastically different value to book value. Since book value focuses on historical data, it doesn’t have projections. Market value, on the other hand, takes all the data along with performance forecasts or projections to determine the market value of the company.
Calculating the market value for publicly traded companies is simple. You take the most recent share price and multiply it by the number of outstanding shares:
(Equity market value = share price x total number of outstanding shares)
However, if you’re trying to calculate the market value of equity for a privately owned company, things can get a little tricky. If the company hasn’t been formally evaluated by accounting firms, financial analytics, or investment bankers, there is no way to know the share price.
You can hire a company to work it out, they will need various financial statements showing all the ins and outs of the private company. There are different methods to working out the market value of a privately owned company, including:
- A discounted cash flow analysis
- Precedent transactions
- A comparable company analysis
Again, before they do this, they need all the information of a company to determine the value.
Personal Equity
There is also personal equity, which is usually referred to as net worth. Personal equity is calculated by subtracting all the liabilities from the total value of personal assets.
Where to Record Equity
The bottom of a company’s balance sheet should have stockholders’ equity or owner’s equity, depending on the ownership.
FAQ
Why is equity in accounting important?
Investors and lenders will look at a company’s equity before making a decision. Reaching and maintaining positive equity displays that the company is generating a profit while being responsible through investing in the business’s long-term success. You should always monitor the financial performance to ensure the equity is taken care of.
What is the difference between equity and stock in accounting?
It’s common to hear equity and stock used interchangeably. Stock represents an ownership interest in a business. This ultimately forms part of a company’s equity, along with things like shareholders’ equity and retained earnings.
Final Thoughts
Once you understand what equity means in accounting, working it out is simple if you have the share price to make the calculations. Where things get tricky is if the data isn’t available, which generally isn’t for privately owned businesses.
That’s where hiring an accountant can come in handy. Not only can an accountant help you establish the book value and market value of your company, but they also ensure you have the correct data for future financial statements.