Characteristics of Equity

Characteristics of Equity

Equity is basically residual interest of equity holder in the company. In other words we can say that Equity is remaining investment of the equity holder in the company. This investment is calculated as net asset i.e. asset- liabilities.

Important Characteristics of Equity

Following are some important characteristics of equity

1.   Accumulated Investment balance

Equity is basically a residual interest of equity holder. In other word we can say that equity is accumulated balance of investment of equity holder. Thus equity is initial investment plus accumulated retained earnings.

2.   Equity is not Fixed

As equity is an accumulated balance of investor investment, thus it changes year to year. Net income increases the equity, where a net loss reduces the equity. Thus performance of the company has direct linkage with equity.

3.   Equity Formula

Equity can be calculated with simple formula paid up capital plus accumulated retained earnings. Equity may also be calculated as net asset i.e. assets – liabilities.

4.   Equity Calculation

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

As name suggests that this statement shows the changes occur during the year in equity. These changes typically explain in term of changes in paid up capital, retained earnings, revolution surplus and share premium account.

This statement is divided into three sections i.e. opening balance, changed during the year and closing balances of above mentioned heads. A simple statement of changes equity has been given for understanding.

	Share Capital	Retained Earning	Share premium	Total
Opening	10,000	5,000	20,000	35,000
During Year	5,000	2,000	3,000	10,000
Closing	15,000	7,000	23,000	45,000

List of important characteristics of equity

Some important characteristics of equity are listed below

a.    Equity is residual interest of equity holder.

b.    Equity can be calculated as net asset.

c.    Equity is not fixed.

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