How To Calculate a Company\’s Equity
Equity refers to the net worth of a company which is owed to the principle investor, usually the owner of the business. It is calculated by taking into account all the resources of the company and subtracting it with the payments and compulsions that the company needs to return to its creditors. Any remaining amount will be the company’s equity. It is not necessary that equity is in surplus as in some cases losses may appear on the balance sheet, a statement reflecting the company’s financial standings.
Instructions
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1
Calculate the resources of the company. This will include current assets, fixed assets and long term assets as well intangible assets.
Current Assets basically refer to items which are consumed in a year or in the operating cycle. It includes cash and cash equivalent, short-term investment, receivables, inventory and prepaid expenses.
Long term assets are investments which are kept for more than a year. Securities such as bonds and stocks, along with insurance investments are also treated in this category.
Fixed Assets of a company include purchases for long-term gains, and include land, machinery, equipment, furniture etc.
Intangible assets are hard to evaluate as they don’t have physical presence. They include patents, trademarks and franchises. Goodwill is an intangible asset but is listed separately on the balance sheet. Incorporating this category will depend on the growth of the business and will vary from business to business.
Add all the current and long term assets to establish the total assets of the company. If for instance, the current assets tally up to $100,000 and long term assets add up to $250,000, then the company’s total assets will be $350,000. -
2
Now calculate the company’s total liabilities which are the obligations they need to settle before closing their financial statements. The classification will be reported as current liabilities which will be paid within a year or an operating cycle. It includes wages, taxes and accounts payable.
Long term liabilities will refer to the payments made in over a year. It will include notes payable, long term leases, pensions, bonds payable etc. Add the two to determine the total obligations of the business. If Current Liabilities is $90,000 and long-term $120,000, then the total amount of liabilities will be $210,000. -
3
Subtract the two above steps i.e. Total Assets – Total Liabilities will equal to a company’s equity. In this case, the company equity is $350,000 – $210,000= $140,000.
