Being a Business Accountant, a question I get asked a lot is ‘what is equity’? Many business owners see it written on tax returns and in spreadsheets and always wonder what it means, well it’s actually not as complicated as you may think.
In its purest form, equity is quite simply the value of an asset minus its liabilities. Simple as that! So what we mean by this is: an asset is defined as an item/property belonging to a business (a company car for example) and a liability simply means how much money is owed on something (the remaining finance on that company car for example). So in simple, the equity of something is the value of your asset minus how much is still owed on it.
How to Calculate the Equity of an Asset
So to work out the equity of an asset you simply need to know the total value of an asset and minus all money owed on that asset. So let’s take our previous example of a company car for instance, this would calculate as follows:
Company Car = £20,000
Finance Owed = £15,000
Equity = £20,000 minus £15,000 = £5,000
Now, it’s of course not always as simple as this especially as the assets get larger and more complicated! For example, you may have just had a MOT & Service performed on the car and still have an invoice outstanding of £200 for the work done – if that’s the case then this £200 would also need to be deducted as a liability.
So don’t forget that calculating equity is also a case of investigating every angle to ensure you have definitely listed ALL of the liabilities on that asset, especially if you are calculating this for your tax return etc.