How to Determine Equity for a Balance Sheet

Your worth

Equity, often called net worth, is the amount of money you have left over after you sell all of your possessions and pay all of your bills. While equity and net worth mean the same thing, equity usually refers to a business while net worth refers to an individual or family. The amount of equity in your company is an easy calculation, because equity is just the net difference between two other figures. The basic equation in accounting is "Assets minus Liabilities equals Owner's Equity."

Things You'll Need

• Specific calendar date for your calculation
• List of all items you own, and their value on that date
• List of all monies you owe on that date
• Calculator

Instructions

Preparation

1. 

   The best date

   Pick an "as of" date for your equity calculation, so that the result refers to a specific point in time. The exact date is not overly important; however, businesses commonly use end-of-month, end-of-quarter, and end-of-year dates to determine equity.

2. 

   What is owned

   List all of your company's assets in a column. Assets are everything your business owns. This ranges from large items (buildings) to the smallest items (paper clips). Assets also include money that your customers are required to pay you in the future, such as when you allow 30 days of credit. List your assets in ascending order of their expected lifespan, starting with cash and ending with buildings.

3. 

   What is owed

   List all of your company's liabilities on the right side of the page. Liabilities are everything your company owes to others. These range from mortgage loans to the $15 you owe a local courier. Items are liabilities if eventually you are required to pay them to somebody.

   List your liabilities in ascending order of their expected lifespan, starting with accounts payable and ending with long-term loans.

4. 

   Valuation

   Assign values to each line item on each list. These values will be the exact amount, or your best estimate, of what each item is worth as of the date you specified.

Calculating Equity

1. 

   Total Assets

   Add each item in the Assets column to determine total assets.

2. 

   Total Liabilities

   Add each item in the Liabilities column to determine total liabilities.

3. 

   Owner's Equity

   Subtract total liabilities from total assets to determine equity. This is how much your company is worth.

Tips & Warnings

• Usually equity will be positive, but companies with negative equity (owes more money than its possessions are worth) are not unknown. Such companies are typically in severe trouble, and may not survive.

• Equity is a useful figure, but its trend of equity may be more important than its absolute value. If your company succeeds year after year, you would expect equity to increase. It may also be useful to compare your equity percentage to competitors to see which are better at converting sales to worth.

• Equity is not an exact figure. It assumes that all of assets could be converted to cash today, and that you use this to pay all you owe. However, you probably could not find a ready buyer for your building or even office supplies in just a few hours if you had to do so. Or, you might have to accept a much lower price than they are worth.

• There are various methods for determining the true value of your assets, but each will affect your equity. Most accountants keep books based on a standard set of accounting principles, which makes it easier to compare companies and equity.

• Bad assets, such as noncollectable accounts, may distort your absolute equity level.

References

• "Financial Accounting"; Walter T. Harrison Jr. and Charles T. Horngren; 2008
• "Foundations of Financial Management"; Stanley B. Block & Geoffrey A. Hirt; 2008