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What is equity in accounting?

Xindu Hendriks July 15, 2025

Equity in accounting represents the remaining interest in a company’s assets after deducting liabilities. It indicates the portion of assets that owners can claim. Whether you’re an individual or a business owner, understanding equity is crucial for assessing financial health.

A solid financial foundation starts with a clear understanding of your finances. This article provides a straightforward explanation of equity in accounting, its appearance on the balance sheet, and its significance for both individuals and businesses.

Table of contents:

What does equity mean in accounting?
Where is equity on the balance sheet?
What is equity for individuals?
What is equity for business owners?
What is a good return on equity?
What is negative equity?
Manage your equity with Payt
Frequently asked questions about equity

What does equity mean in accounting?

Equity signifies the portion of assets that remains after all liabilities are settled. It’s calculated by subtracting total liabilities from total assets. This figure provides insight into the net worth of an individual or business.

For businesses, equity comprises contributed capital and retained earnings. For individuals, it includes assets like savings, home equity (property value minus mortgage), and investments. Maintaining sufficient equity offers financial stability and resilience.

Where is equity on the balance sheet?

On the balance sheet, equity is shown on the right-hand side, often alongside liabilities, representing the owners’ claim after debts are settled.

Example balance sheet:

Assets	Amount (€)	Liabilities	Amount (€)
Fixed assets		Short-term liabilities
Buildings	75,000	Accounts payable	30,000
Equipment	30,000	Taxes payable	10,000
Current assets		Long-term liabilities
Inventory	50,000	Mortgage loan	80,000
Accounts receivable	30,000	Equity
Cash and bank	15,000	Contributed capital	30,000
		Retained earnings	50,000
Total assets	200,000	Total liabilities and equity	200,000

What is equity for individuals?

For individuals, equity refers to personal net worth: assets minus liabilities. This includes savings, property value exceeding mortgage balances, and investments. Understanding personal equity is essential for financial planning and understanding your net worth.

What is equity for business owners?

In the context of business, equity represents the owner’s claim on the company’s assets after liabilities are deducted. It’s a key indicator of financial health and long-term sustainability.

What is equity in a sole proprietorship?

For sole proprietors, equity comprises the owner’s initial investment, additional contributions, and accumulated profits or losses. It’s directly tied to the owner’s personal finances.

What is equity for self-employed individuals?

Self-employed individuals often operate as sole proprietors, making their business and personal equity effectively the same. It’s crucial to monitor this to ensure business viability and personal financial security.

What is a good return on equity?

Return on equity (ROE) measures a company’s profitability relative to its equity. It’s calculated as Net Income divided by Shareholder’s Equity. A good ROE varies by industry but generally falls between 10% and 15%.

It helps investors evaluate how efficiently a company uses equity to generate profits.

What is negative equity?

Negative equity occurs when liabilities exceed assets, resulting in a negative net worth. For individuals, this might happen if a property’s market value falls below the outstanding mortgage. For businesses, it indicates financial distress and may signal financial instability or even insolvency.

Manage your equity with Payt

Effective equity management starts with robust accounts receivable processes. Payt offers solutions to streamline invoicing and collections, enhancing cash flow and financial stability.

Benefits of using Payt:

Accelerated payments: Invoices are paid up to 30-50% faster.
Time efficiency: Automate reminders and follow-ups, saving up to 80% of your time.
Enhanced client relations: Clients can easily communicate and settle invoices through the portal.
Control and customization: Tailor communication strategies to fit your business needs.
Data protection: Certified to ISO 27001 standards.
Real-time insights: Monitor outstanding invoices and client interactions instantly.

Discover how Payt can support your financial management. Download our brochure or schedule a free demo today.

Frequently asked questions about equity

How much equity can one have?

There’s no set limit to the amount of equity one can hold. However, for individuals, exceeding certain thresholds may have tax implications. For businesses, higher equity often reflects financial robustness.

How is equity calculated?

Equity = Total assets – Total liabilities. For example, if assets total € 150,000 and liabilities are € 60,000, equity equals € 90,000.

How is average equity determined?

Average equity is calculated by adding the beginning and ending equity for a period and dividing by two. This metric is useful for analyzing financial performance over time.