Equity in Accounting: What It Is, How to Calculate It, and Why It Matters
"Equity" shows up in a lot of conversations—fundraising, exits, even owner pay—but at its core it's simple: equity is the value of an ownership stake. In personal finance, it's your home value minus the mortgage; in business, it's what would be left for owners if you sold everything and paid off every debt.
This guide walks through the essentials—how to calculate equity, the main types, book value vs. market value, and how equity shapes real world decisions around financing, investment, and exits.
The Basics: Equity = Assets – Liabilities
On the balance sheet, equity is whatever remains after liabilities are covered.
Formula (book value):
Equity = Assets – Liabilities
Quick example:
• Assets: 90,000 (cash 20k, equipment 60k, inventory 10k)
• Liabilities: 65,000 (bank loan 50k, payables 15k)
• Equity: 90k – 65k = 25,000
That 25k is the owners’ residual interest based on the company’s recorded numbers—not a market valuation, but a solid starting point.
Common Types of Equity (and What They Mean)
Owner's / Shareholders' Equity: The overall owner stake on the balance sheet (for sole props and corporations).
Partner Capital: Each partner's share in a partnership, tracked in individual capital accounts.
Retained Earnings: Cumulative profits left in the business instead of distributed—can go negative if losses pile up.
Additional Paid In Capital (APIC): What investors paid above a share’s stated or par value.
Treasury Stock: Shares the company bought back, which reduces total equity.
Under ASPE/IFRS you might also see contributed surplus or accumulated other comprehensive income, but they all roll up to the same big idea: who owns what piece of the company.
Book Value vs. Market Value
Book value (accounting equity): Assets minus liabilities using accounting values—historical cost, depreciation, accruals.
Market value (what buyers pay): The price investors put on your business today.
For public companies:
Market Value=Shares Outstanding X Share Price
For private companies, market value is often a multiple of revenue or EBITDA, adjusted for growth, risk, and comparable deals. A lean, fast growing firm might have market value far above book value, while a distressed company might trade below book.
Positive vs. Negative Equity
Positive equity: Assets are greater than liabilities—a healthy signal to lenders and investors.
Negative equity: Liabilities are larger than assets—pointing to pressure from debt, ongoing losses, or overly aggressive distributions.
Negative equity doesn't automatically mean the business is doomed, but it usually tightens financing options and calls for a plan: fresh capital, cost resets, or margin improvements.
Real World Ways Equity Gets Used
Getting a loan: Strong equity improves your leverage profile and makes you more attractive to lenders.
Attracting investors: Your equity structure and cap table show who owns what and how value is building over time.
Planning an exit: Buyers look at equity and trends in revenue, margins, and churn to price and structure the deal.
Bringing in partners or key hires: Equity grants align incentives and clarify ownership.
Governance and control: Shares often carry voting rights, so selling equity can literally change who makes the big calls.
Quick Checks for Founders and Owners
Is retained earnings growing? Consistent growth points to durable profitability.
What's my debt to equity ratio? Higher leverage means more risk and less flexibility.
Are dividends or draws sustainable? Don’t pull out so much that you starve working capital and growth.
Do book and market stories match? If your pitch is “high growth, efficient unit economics,” your numbers should back that up.
FAQ (Rapid Fire)
Is equity the same as valuation?
No. Equity (book) is the accounting residual. Valuation (market) is what a buyer or investor is willing to pay.
Can equity be negative and the business still run?
Yes—but raising money and refinancing get harder. You’ll need a plan to rebuild capital through profits, new investment, or restructuring.
Where do retained earnings live?
In the equity section. Profits increase them; losses and dividends decrease them.
Does revenue growth always increase equity?
Not always. If growth burns cash—think low margins, high CAC, or heavy capex—equity can flatten or decline even while top line rises.
How PCS Helps You Strengthen Equity (and Tell a Better Story)
Clean, GAAP/ASPE ready books so your equity number is accurate and defensible.
KPI and unit economics dashboards that connect margins, CAC/LTV, and cash conversion back to equity health.
Capital structure & scenario modeling for “what if” questions around debt, dividends, and new investment.
Fractional CFO guidance to align growth plans, profitability, and owner outcomes.
Bilingual, cloud based support across Montréal/Québec and Canada, with deep QuickBooks Online expertise.
Bottom line: when you understand equity, you make better calls about loans, investors, compensation, and exits. Tight books plus a grounded strategy turn “equity” from an abstract accounting term into a real growth lever.
Want clarity on your equity and options? Book a free consultation with Perfect Cents Solutions for a balance sheet review and concrete next steps to strengthen your position.
