Equity on the balance sheet: definition and calculation

Equity or equity is the financial resources of a company: the sum that appears in the contribution of partners or shareholders , or the resources generated by the company itself. It is therefore the company's available cash which, according to the law, must be equal to or greater than half of the share capital.

How to calculate equity?

To calculate the equity Recommended Tools of a business, there are two methods. The first is the simplest and consists in subtracting the debts from the assets of the company in order to release the equity capital. The second calculation is to add the contributions, the revaluation surplus, the equity difference, the profits that have not been distributed, the losses, the investment grants, and the regulated provisions. . The sum of these elements constitutes equity.

To clarify this second formula, the contributions are made up of the capital and the premiums linked to it. The revaluation surplus is the difference between the present value and the net book value of the company: the revaluation only concerns all fixed assets.physical and financial. The difference in equity is the difference observed between the value of securities valued by equity method and their purchase price. Unpaid profits are reserves, corporate profits and retained earnings. The losses relate to the retained earnings and losses for the year. The investment grant is financial assistance granted to companies and which is recorded as equity because it will not be reimbursed. Finally, the regulated provision is established in application of the tax provisions of the General Tax Code and grouped together in the company's equity.

How to increase equity?

It is advisable to plan for an increase in social capital according to the growth of the company. There are several ways to increase the equity of the business. The first way is to increase the contribution of social capital . This operation can be done by each partner or by recruiting a new partner who will contribute to the capital and obtain shares in the company or shares.

In addition, the retained earnings consider at the same time the losses and the profits of the previous years: if a part of the profits remain in the accounts of the company, the shareholders' equity may increase. Finally, shareholders' equity can also be increased thanks to the profits of the past financial year. On the other hand, if the financial year shows a loss, shareholders' equity will decrease according to this negative result.

How to interpret your equity?

Where is equity on the balance sheet? This is the preliminary question to answer before interpreting the funds of his company. They appear in the balance sheet liabilities, that is to say in the column to the right of the accounting balance sheet document . In this passive, there are two parts. On the one hand, there are the debts of the company which must be honored with banks, suppliers, various credit institutions. On the other hand, we have shareholders' equity, fed by contributions from shareholders and partners. As much as debts, receivables and fixed assets, equity is one of the most important components of the balance sheet.

The growth in equity is a sign of the good health of the company. This means that the company is stable, that it has substantial capital to serve as collateral with banking institutions. Finally, the increase in equity enhances the confidence of customers, suppliers and business partners. Thus, it is the whole company that benefits from the consolidation of the cash flow because it makes it possible to finance new investments, to develop the exploitation of entrepreneurial activities. The more capital the company has, the more its value and reputation increases. When equity is in the red, it's a sign that the business has racked up more debt than resources.

How to rebuild equity?

The company reconstitutes its shareholders' equity when they are negative, following losses, with the consequence of reducing the cash flow to the equivalent of half of its share capital. The Commercial Code requires the reconstitution of equity for limited liability companies (SARL), public limited companies (SA), simplified joint stock companies (SAS) and partnerships limited by shares (SCA). The law requires that the negative capital situation be reviewed and adjusted, last time, at the end of the second financial year following the one in which the losses were recorded. The principle of reconstituting shareholders' equity consists of replenishing the cash flow in order to have an amount greater than half of the share capital.

How to rebuild equity? The entrepreneur has several solutions: increasing the company's share capital, reducing the share capital, or revaluation of the balance sheet or all three methods combined. The increase in equity has already been explained previously: in summary, the operation consists of replenishing the funds through new contributions from shareholders or the co-option of a new shareholder who will pay his share of the contribution to the capital. As for the reduction of the share capital, it is a process which consists in purging the losses of the company then to replenish again the funds in order to replenish them. Reducing the share capital to replenish funds is not possible for all companies that have suffered losses: without sufficient capital, reducing registered capital will not necessarily solve the loss of the business. Finally, the reconstitution of capital by revaluation of the balance sheet is also a technique for reconstituting capital, but of lesser scope. Intangible fixed assets, which are the company's assets that are neither physical nor monetary, cannot be recognized in this revaluation. It only affects tangible and financial fixed assets whose value is greater than that of the balance sheet.

Equity is not the total wealth of the business but is in fact a source of financing. For the balance sheet to remain properly structured, the company must be able to maintain its equity at an amount which is at least equal to its financial and operating debts.