Equity is the amount of capital invested or owned by the owner of a company. The equity is evaluated by the difference between liabilities and assets recorded on the balance sheet of a company. The worthiness of equity is based on the present share price or a value regulated by the valuation professionals or investors. This account is also known as owners or stockholders or shareholders equity.
The accounting equation is Assets – Liabilities = Equity
Types of Equity:
There are two types of equity. Namely:
- Book Value: In accounting, equity is listed in its book value and calculated by the financial statement record and the balance sheet equation. The equation used to evaluate book value is Equity = Assets – Liabilities. Though the assets are the sum up of all the company’s both non-current and current assets. Other details incorporated in the main account assets are fixed assets, cash, inventory, accounts receivable, property plant, intangible assets, etc.
Similar, the liabilities are sum up of current and non-current liabilities on the balance sheet. Other accounts are short-term debt, credit, deferred revenue, accounts payable, long-term debt, fixed financial commitment and capital leases.
- Market Value: In finance, equity is indicated as market value, which might be significantly lower or higher than the book value. The difference is because the accounting statement is looking at the past (past expenditures), while financial statement is looking ahead and forecast what the financial status of a company be.
For a public traded company, the market value of its equity is calculated as Market Value= Share Price X Shares Outstanding. Whereas, for a private company to analyse the market value an investment bankers, boutique valuation firm or accounting firm are hired.
The Market Value of Equity:
The market value of Equity is the total market value of all the outstanding stocks of a company. Here, the outstanding stock/share are the shares that are owned by the shareholders, investors, etc., of a company. Equity refers to the assets of a company after the liabilities are paid. It is also known as Market Capitalization.
Therefore, the market value of equity is continuously changing as the two inputs(outstanding stock and market value) keeps on changing. In a company, the market value of equity is different from the book value of Equity, as the book value doesn’t evaluate the company’s future potential growth.
Market Value of Equity is evaluated by multiplying the current market price per stock by the total number of the organisation’s outstanding stocks.
Factors Affecting Market Value of Equity:
- A number of Market Contenders- The market becomes more comprehensive and competent if the number of investors, traders, analysts increases.
- Availability of New Information- Any new updates in the company like its expansion, new products production affects the financial status of the company. Therefore it affects the price of the company’s share that eventually influences the market value of the company.
- Circular Factors- Market value keeps fluctuation. Like in recession, the market value decreases.
- Government Interference- This point immensely interrupts the market value of the companies. In cases, where few countries prohibit foreign people to trade in their market. So, the market value of these companies in such a closed market cannot expend as compare to other open markets.
If ABC Company had one lakh outstanding shares, and if the company’s current market value is ₹50 per share. The company’s market value of equity will be (₹50 per share X 5 lakh outstanding share = 50 lakhs)
The above mentioned is the concept, that is elucidated in detail about ‘What is equity?’ for the Commerce students. To know more, stay tuned to BYJU’S.
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