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Equity Formula:
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The equity formula (E = A - L) is a fundamental accounting equation that calculates the equity or net worth of an entity by subtracting total liabilities from total assets. It represents the residual interest in the assets of the entity after deducting liabilities.
The calculator uses the equity formula:
Where:
Explanation: This formula represents the basic accounting equation and shows the relationship between assets, liabilities, and equity in any financial entity.
Details: Calculating equity is essential for understanding the financial health of a business or individual. It represents the owner's stake in the assets and is a key indicator of financial stability and net worth.
Tips: Enter total assets and total liabilities in dollars. Both values must be non-negative numbers. The calculator will compute the equity (net worth) by subtracting liabilities from assets.
Q1: What does a negative equity value mean?
A: Negative equity indicates that liabilities exceed assets, which may signal financial distress or insolvency.
Q2: How often should equity be calculated?
A: For businesses, equity should be calculated regularly, typically at the end of each accounting period. Individuals may calculate net worth annually or when making significant financial decisions.
Q3: What's included in assets and liabilities?
A: Assets include all valuable resources owned (cash, property, investments). Liabilities include all debts and obligations (loans, mortgages, accounts payable).
Q4: How does equity differ from market value?
A: Equity is based on accounting values from financial statements, while market value reflects what investors are willing to pay for the business.
Q5: Can equity be increased?
A: Yes, equity can be increased by generating profits, receiving additional investments, or reducing liabilities.