What is equity?

What is equity?

The equity of a company relates to the total value of assets. This includes assets such as machinery, stock, inventory, and liquid assets. Within the category of a company’s capital, various types of equity can be distinguished. These include equity and debt. Debt can further be categorised into short-term debt and long-term debt.

What is equity?

A company’s equity consists of assets minus liabilities, which means subtracting the debts from the assets. The meaning of equity can thus be expressed as follows: equity = assets - liabilities. Assets are listed on the left side of the balance sheet, and liabilities are on the right side of the balance sheet. Want to know more about assets and liabilities? Read here what assets and liabilities exactly are.

Equity can increase when your company makes a profit or when there is a private contribution or capital injection. Equity decreases when there is a loss, distribution of profits or dividends, depreciation of assets, or when there is a private withdrawal or capital return.

What is debt?

The debt of a company consists of financial obligations, such as debts in the form of a business loan (Debt = total debt - equity). This type of equity is therefore listed on the credit side of the balance sheet under liabilities. There is a distinction between short-term debt and long-term debt.

What is short-term debt?

Short-term debt refers to debts that can be paid off relatively quickly. Think of creditors to whom you still have to pay an invoice or a trade debt that is still outstanding with a supplier. A short-term loan also falls under short-term debt.

What is long-term debt?

With long-term debt, there is a debt that has been incurred for the long term. A mortgage for a business property is an example of this, as well as lease debts and bond loans. One of the characteristics of long-term debt is that there is usually interest involved, which is often not the case with short-term debt, except for a short-term loan obtained from a bank.