Equity is also referred to as a company’s net worth. Equity represents an owner’s investment in the business. The equity in a business can be defined as the residual amount left after deducting the company’s obligations from its resources. The computation for figuring a company’s equity is based on the accounting equation, which states that assets equal liabilities plus shareholder equity. Equity appears on a company’s balance sheet, which is a statement indicating a company’s financial position at a specific point in time.
Tally the company’s total current assets. A current asset is a resource controlled by the company that will be converted into cash within one year. Current assets include cash, accounts receivable, prepaid insurance and inventory.
Compute total long-term assets. Long-term assets are resources a company will convert to cash in over a year, such as land, equipment, buildings and patents.
Add total current assets to total long-term assets. The result is the company’s total assets. Assume a company has total current assets of $124,000 and total long-term assets of $200,000. In this scenario, the company has total assets of $324,000.
Calculate the company’s total current liabilities. Current liabilities are obligations a company has to pay within one year, such as accounts payable, wages payable and taxes payable.
Total the company’s long-term liabilities. Long-term liabilities are obligations the company will pay in over one year. Long-term liabilities include notes payable, mortgages payable and bonds payable.
Add total current liabilities to total long-term liabilities. The result is the company’s total liabilities. For instance, a company with total current liabilities of $87,000 and total long-term liabilities of $123,000 has total liabilities of $210,000.
Subtract total liabilities from total assets to determine the company’s equity. For example, a company with $210,000 total liabilities and $324,000 total assets has $114,000 in equity.