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deducted. You may hear of equity being referred to as “stockholders’ equity” (for corporations) or
“owner’s equity” (for sole proprietorships). Equity can be calculated as:
The word “equity” can also be used to refer to personal finances. For instance, if someone owns a
$400,000 home, and has a $150,000 mortgage on it, then the owner can say he has “$250,000 in
equity”, in the property.
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals
and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you
need income tax advice please contact an accountant in your area.
Equity in a company may include tangible assets (assets in physical form) and intangible assets (assets
you can’t actually touch, but are valuable). Here are some examples:
TANGIBLE ASSETS
Accounts Receivable
Building(s)
Cash
Equipment
Furniture
Inventory
Land
Supplies
INTANGIBLE ASSETS
Brand recognition
Copyrights
Customer lists
Patents
Trademarks
The assets of a company are offset by its liabilities. Common liabilities include:
Accounts payable
Interest
Loans
Mortgages
Taxes
Unearned revenues
Warranties
Equity is not considered an asset or a liability on a company’s financial statements. Equity is what you
get when you subtract liabilities from assets.
Equity is reflected on a company’s balance sheet. Management can see its total equity figure listed at
the bottom of this statement, next to “Total Liabilities and Stockholders’ Equity” or “Total Liabilities &
Owner’s Equity”.
If the amount is negative, then the owner(s) or shareholders have no equity in the business, and the
company is considered to be “in the red”.
Stock is a traded equity. You will often hear the words “stock” and “equity” used interchangeably, or
referred to as “equity shares”.
Equity financing is a method of raising capital for a business through investor(s). In exchange for money,
the business gives up some of its ownership, typically a percentage of shares.
Equity financing can offer both rewards and risks for an investor and a business owner.
The investor is taking a risk, because the company does not pay back his investment. Rather, the
investor is now entitled to more of the profits (because he now owns more of the company). This means
an investor’s earnings may become significant as time goes on. However, if the company fails, then the
investor can lose everything.
The business owner may now have the capital to realize his dreams. However, depending on the
percentage of ownership given up, decisions regarding how the business is run may now have to now be
shared. Relationships may become strained.
It is not uncommon for a startup to have several rounds of equity financing, in order to expand and
meet its goals.