Business and Accounting:
Equity, the Difference in Assets and Liabilities

Equity.  This is the one thing we can never have too much of, in any situation. Equity in your home is a top priority for everyone. Equity in your 401k is necessary for retirement options.  But how do we gain equity, and what can we do to increase our equity?  This question and others like it are asked all the time in the business arena.  If you're going to become a member of the working world, you're going to need to understand and know how to work with your equity.

In your personal life, your equity builds as you pay for things like your car, your home, and your household furnishings.  If you purchase or inherit land, or heirlooms, your equity increases.  A personal net worth statement will give you an accurate picture of your net worth, also known as your equity.  Equity, after all is the difference between your assets and your liabilities.  Your personal net worth is your equity in your personal possessions. 

In business, the difference between your assets and your liabilities is referred to as equity, generally speaking, owner's equity.  If your business is owned by stockholders it is known as stockholder's equity.  Either way, it is the debt free value of the business.

For what purpose do we strive to increase our equity, whether it is in our business or our personal lives?  Because when we increase our equity, we increase the monetary value of the possessions or business to us, without any debt liability.  For example, if you build a business, from the ground up, and you get ready to sell that business, the more equity you have established, the more money you will keep from the sale of the business.  If you have established very little equity, the majority of the purchase price must go to paying the outstanding debts your business has.

How do businesses increase their equity?  Equity is increased through their sales and sometimes through financial investments. This is the reason for the extreme concern of sales goals, sales budgets, and sales projections.  No matter what kind of business you want to talk about, their profit, and in the long-term aspect, their equity is generally increased through an increase in sales.

Equity in real estate is a highly visible term, and one with which you will probably have more exposure, unless you establish your own business.  Real estate equity can build more quickly than almost any other form of equity, simply because of rising real estate prices.  This is one of the features of real estate that makes it so appealing to investors and investment groups. 

As you can see, from just this brief discussion of equity, the more you have, the more comfortable your life; whether it's your personal life or your business life.  As you advance in years, and retirement begins to become a concern, you will be very concerned with the amount of equity you've built in your retirement fund.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.