WTF is Equity??????

Ok, this is a special one for all you accounting students out there. Now, for the more experienced ones, i'm sure you are well aware of what Equity is and how it affects your business, but for a lot of students, especially the new ones and the poor business course students who are forced to take horrible, horrible accounting, the term 'Equity' can be very confusing. So, to start off, lets take a look at the basics:

Every business is made up of three things basically:

1. Assets
2. Liabilities
3. Equity



Assets are things that generate income for the business, directly (like cash, goods for sale, people who owe you money) and indirectly (like office buildings, cars to move your goods around, etc).

Liabilities are funds that you borrow in order to buy assets. Liabilities can be borrowed from Banks (bank loan), friends (friendly loans), family (non-paying loans) or loan sharks (deadly loans).

Equity is the opposite of Liability. Equity is basically the money that you, as a businessman put into the business. Meaning that if you put in $1000 of cash into the business, that is the business' equity. Let me stress that it is NOT YOUR MONEY ANYMORE, it is the business' money. And you are NOT your business. They are different!!! So now your business can use its equity to buy assets to make more money for the business. yay.

So, when you put $1000 into your business, what happens is that you now own a $1000 'share' in your business.

So Equity represents your level of ownership in the business.

And that, boys and girls, is the SIMPLE definition of what equity is.

Stay tuned for more complicated stuff... :D