Equity
Equity refers to the ownership interest in a company, representing what remains after liabilities are subtracted from assets. There are various definitions of this term. For example, Karl Marx defined capital as “self-growing property.” Today, the term “equity” is most commonly used in business. While the term “capital” is sometimes used interchangeably with “equity”, their meanings may differ depending on the context.
Types of Equity
There is a wide range of equity typologies, depending on their purpose. Some of the most common include:
- Classification by investment scheme.
- Classification by investment object.
- Classification by form of ownership.
Explanation of Terms
- Classification by investment scheme.
Investing is the process of allocating financial and real assets with the aim of generating future profits. Financial equity refers to securities and money. Real assets include equipment, raw materials, real estate, and land.
- Classification by investment object. Investment assets can be divided into capital and liquidity.
Capital consists of everything used in the operation of a business, while remaining in the ownership of the enterprise, without changing the form of ownership. This includes items such as furniture, equipment, land, etc. The exception is depreciation, as it refers to the gradual transfer of the cost of fixed capital over a period of time to the cost of products.
Liquidity refers to assets that can be quickly converted into cash or are readily available for business operations. For example, this category can include goods, money, accounts receivable and accounts payable, everything that is used in the production process.
- Classification by form of ownership implies that company capital can be categorized into own (equity) and borrowed (debt) funds.
Own equity includes everything the company owns after deducting debts and other obligations. What applies? The authorized capital, profit from the company’s work, any tangible assets belonging to the company, intellectual property.
Borrowed equity (funds) are resources that can be used by the company, but must be repaid in the future, for example, a bank loan, an overpayment from a client.
Examples
In some cases, the same object can be attributed to different categories of equity. For example, consider a rented furniture restoration workshop. The rented space is treated as a liability or part of borrowed capital. A loan used to hire staff and expand operations would be classified as borrowed capital allocated to support operational liquidity.