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The owner(s) of a business need to know what that business is worth at any time. Equity is a figure that will appear on the Balance Sheet and will give that information. Equity is also known as Nett Worth and Capital. However these other terms are misleading since they casn be used for other accounting features
Basically, Equity is the difference between the Assets of an enterprise and its Liabilities but quite often the figures on the Balance Sheet that go to make up those two features are only a snapshot of the situation at that moment when the information is being accessed. Thus it is necessary to take account of the various time dependent aspects of the Balance Sheet items when making an assessment of the Equity in an enterprise
Things such as the value of the inventory of parts and materials, work in process and unsold finished goods in a manufacturing business are subject to the state of the market and could be worthless if they cannot be sold. Accruals for future payments such as utility bills which depend on usage are really estimates of what is due to be paid and could be wrong
Take care when looking at Equity to be sure that all of the figures used are realistic and not the results of 'creative' accounting
Comments and suggestions for improving this site are appreciated and should be addressed to administration
Last Update 28-Feb-2010
Date first published 07-Nov-2005