What does an equity means?
Definition of equity: Equity is the difference between assets (assets) and liabilities in the balance sheet (e.g. of companies). Equity is available to the company for an indefinite period and there are no repayment obligations. Complementary to equity is debt capital, which includes the company’s debts. Equity and borrowed capital together make up the liabilities on the balance sheet.
Equity capital (EK) refers to all financial resources that consist of the owner’s own share of the capital of a company. This capital is available to the company for an indefinite period and is not subject to any repayment obligation. The counterpart to equity is debt capital, which, together with equity, represents the total capital of a company.
Equity is the capital part of an enterprise, which is composed of its own financial resources. Equity and debt capital together form the total capital.
According to §266 HGB, the equity consists of the following components:
Subscribed capital: Corporations such as Aktiengesellschaft (AG) or Gesellschaft mit beschränkter Haftung (GmbH) are obliged to make a capital contribution when they are founded, which is also referred to as a parent contribution or share capital. The subscribed capital consists of this contribution and any subsequent capital increases.
Capital reserves: Capital reserves, like retained earnings, are open reserves. They are mandatory for corporations for the formation of financial reserves. They are formed, for example, from agio amounts when issuing shares.
Retained earnings: Retained earnings include financial reserves that are retained from the annual profit. They are divided into:
Statutory reserves: Corporations are obliged to create statutory reserves. Joint-stock companies (AGs), for example, must retain 5% of their retained earnings until these, together with the capital reserves, amount to 10% of the share capital.
Reserves for company shares: Reserves for company shares must be formed in the amount of the total amount of the shares.
Statutory reserves: Companies can define the formation of further reserves in their articles of association themselves.
Other retained earnings: Other retained earnings include all reserves that are not defined in the upper items.
Profit carry-over: The profit carry-over is formed from the remainder of the previous year’s profit, which remains after the profit has been used. The loss carryover is the counterpart to this.
Net income/net loss: Net income is the profit after deduction of all taxes. The opposite of this is the annual shortfall (loss).
What is equity mean in finance?
What is an example of equity?
What are the 4 types of equity?