Equity
What does Equity Mean?
In accounting, equity refers to the difference between assets and liabilities.
![e1](https://seeaccountingnow.online/wp-content/uploads/2020/04/e1.jpg)
How it Works
Assets
A business will have assets.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e2.jpg)
Assets are things the business owns, such as money in the bank, equipment, and inventory.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e3.jpg)
They also include money owed to the business by customers.
![e4](https://seeaccountingnow.online/wp-content/uploads/2021/06/e4.jpg)
Liabilities
The business will also have liabilities.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e5.jpg)
Liabilities show what the business owes to others.
![e6](https://seeaccountingnow.online/wp-content/uploads/2021/06/e6.jpg)
Loan accounts show money owed to lenders.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e7.jpg)
Supplier accounts show money owed to suppliers.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e8.jpg)
Equity Make Up
Equity is the difference between assets and liabilities.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e9.jpg)
It shows the money owed to the business owners or shareholders.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e10.jpg)
In part, equity is made up by capital.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e11.jpg)
This is money that comes from the business owner themselves or from stock holders.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e12.jpg)
In other words, it is money the business owes to its owners.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e13.jpg)
Equity also includes retained earnings.
![e14](https://seeaccountingnow.online/wp-content/uploads/2021/06/e14.jpg)
Retained earnings is accumulated net profit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e15.jpg)
At period-end, net profit is transferred to retained earnings.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e16.jpg)
This, then, also becomes money owed to the owner or shareholders.
![e17](https://seeaccountingnow.online/wp-content/uploads/2021/06/e17.jpg)
Equity changes as the relationship between assets and liabilities changes.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e18.jpg)
For example, the business may invest its profit in new equipment.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e19.jpg)
Doing this will increase overall assets.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e20.jpg)
As a result, the difference between assets and liabilities will increase.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e21.jpg)
This, in turn, will result in an increase in equity.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/e22.jpg)
© R.J. Hickman 2020