There are several different meanings of equity however it is most commonly known in accounting and finance as the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds these assets then a negative equity exists. In an accounting context, a shareholders' equity or stockholders' equity represents the remaining interest in assets of a company that are spread among individual shareholders of a common or preferred stock.
At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets which is the accounting equation. After liabilities have been taken into account, the positive remainder is deemed the owner's interest in the business.
This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse the owners' equity. Therefore the owners' equity is reduced to zero. Ownership equity is also known as risk capital or liable capital.
Equity is also the name given to the set of legal principles in jurisdictions following the English common law tradition that supplements strict rules of law where their application would operate harshly. In civil legal systems, broad 'general clauses' allow judges to have similar leeway in applying the code.
Equity is commonly said to 'mitigate the rigor of common law', allowing courts to use their discretion and apply justice in accordance with natural law. In practice, modern equity is limited by substantive and procedural rules, and English and Australian legal writers tend to focus on technical aspects of equity. There are 12 'vague ethical statements' that guide the application of equity, and an additional five can be added.
At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets which is the accounting equation. After liabilities have been taken into account, the positive remainder is deemed the owner's interest in the business.
This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse the owners' equity. Therefore the owners' equity is reduced to zero. Ownership equity is also known as risk capital or liable capital.
Equity is also the name given to the set of legal principles in jurisdictions following the English common law tradition that supplements strict rules of law where their application would operate harshly. In civil legal systems, broad 'general clauses' allow judges to have similar leeway in applying the code.
Equity is commonly said to 'mitigate the rigor of common law', allowing courts to use their discretion and apply justice in accordance with natural law. In practice, modern equity is limited by substantive and procedural rules, and English and Australian legal writers tend to focus on technical aspects of equity. There are 12 'vague ethical statements' that guide the application of equity, and an additional five can be added.
