Equity vs Assets
At year end, organizations prepare financial statements that represent their activity for the specific period. One such statement that is prepared is the balance sheet and includes a number of items such as assets, liabilities, equity, drawings, etc. The following article discusses two such balance sheet items; equity and assets, and clearly explains the difference between the two.
Equity
Equity is a form of ownership in the firm and equity holders are known as the ‘owners’ of the firm and its assets. Any company, at its stage of start-up, requires some form of capital or equity to begin business operations. Equity is commonly obtained by small organizations through the owner’s contributions, and by larger organisations, through the issue of shares. Equity may act as a safety buffer for a firm and a firm should hold enough equity to cover its debt. The advantage to a firm of obtaining funds through equity is that there are no interest payments to be made as the holder of equity is also an owner of the firm. However, the disadvantage stands that dividend payments made to equity holders are not tax deductible.
Assets
Assets are commonly known as anything with a value that represent economic resources or ownership that can be converted into something of value such as cash. Assets may be in the form of intangible financial assets or tangible physical assets. Intangible assets may not have a physical presence except for the existence of a document that represents the ownership interest held in the asset. Examples of such financial assets include stocks, bonds, funds held in a bank, investments, accounts receivable, company goodwill, copyrights, patents, etc. Physical assets are tangible assets and can be seen and touched, with a very identifiable physical presence. Examples of such physical assets include land, buildings, machinery, plant, tools, equipment, vehicles, gold, silver, or any other form of tangible economic resource. Physical assets usually experience a reduction in value due to wear and tear of the asset through continuous use known as depreciation, or may lose their value in becoming obsolete, or too old for use.
Assets can also be categorized into fixed asset and current assets. Fixed assets include machinery, equipment, property, plant etc. Current assets include assets such as debtors, stock, bank balance, cash, etc.
Equity vs Assets
Assets and equity are both items that are included in a balance sheet at year end. Assets and equity are quite different to each other, even though having high levels of either equity or capital or both are considered to be beneficial to a business’s financial strength. Assets represent any form of physical, financial, tangible, or intangible item that can be converted into cash. Equity refers to an inflow of funds contributed by the owners of shareholders to develop and grow the business further.
Summary:
• Assets and equity are both items that are included in a balance sheet at year end.
• Equity is a form of ownership in the firm and equity holders are known as the ‘owners’ of the firm and its assets. Equity is commonly obtained by small organizations through the owner’s contributions, and by larger organisations through the issue of shares.
• Assets are commonly known as anything with a value that represent economic resources or ownership that can be converted into something of value such as cash.