Maximizing Business Capital with Equity
Desiliciouskitchen-In a business, capital is a very crucial thing to be considered by a businessman. Especially if you just want to start a business, own capital means the amount or collection of money and goods that are used as the basis of a job. Learn about the types of equity below.
In accordance with its understanding, capital in business is a foundation or basis for starting a business. Even in business, capital must be managed very well in order to increase revenue for your business. Capital monitoring and management must be carried out in good financial statements as well.
Capital in a business will always be linked to equity. Have you ever heard the word ‘equity’ if you have, what comes to your mind?. Some of us may still be unfamiliar with this word, but some other people who are close to accounting science are certainly no stranger to hearing the word ‘equity’.
Then, what is equity? And what does that have to do with business? In this article, you will be given information about equity from its definition to examples of its application to your business.
Definition of Equity
Basically equity is the amount of rights or interests of company owners in company assets, equity is also one of the important elements in the balance sheet statement.
In the basic accounting equation itself, the left side represents assets and the right side represents debt or equity. Therefore the basic formula for assets is:
assets = liabilities + equity.
On the left side of the journal, it will contain the resources controlled by a business or company, while the right side of the journal will contain the amount of interest of creditors and owners in the company’s assets. This amount of interest is called equity.
Equity usually comes from the owner’s investment type and the company’s operating results or business income after deducting all liabilities on the balance sheet, so it can be concluded that equity is the difference between the company’s assets and liabilities.
Purpose of Equity
The question that arises next is what is the purpose of equity itself in the financial reporting of your business or company?
Basically, the purpose of equity is efficiency in the management of the company’s management, collecting data on investments that have been received by the business as well as simulating future investment prospects and reporting on the responsibilities of business owners or companies.
Types of Equity
After knowing the meaning and purpose of equity, you must also understand the types of equity that exist.
In general, there are five types of equity that exist in a company or business in the form of a company, namely:
1. Equity Addition Account
The first type of equity is an equity increase account which can be divided into two types, namely retained earnings and paid-in capital which will be explained in the following types of equity.
2. Paid-in Capital
The second is the paid-in capital which has been mentioned in the first type of equity, namely the account for the addition of equity above. Paid-in capital is the amount of money deposited by shareholders.
This type of paid-up capital can be divided into two types, namely:
- Share Capital, which is the nominal number of outstanding shares.
- Agio or Disagio Shares, which is the difference between the shareholder’s deposit and the nominal amount of shares. The difference between premium and disagio is if the premium is the difference above the nominal value while the disagio is the difference below the nominal share.
The third type of equity is income or revenues which can be interpreted as business profits that can add to the value of the company each recording period.
In this case, revenue is retained earnings that are used to develop the business so that it can increase revenue from the business itself.
4. Equity Reduction Account
The fourth is an equity reduction account, as opposed to an equity increase account. The equity reduction account is the opposite, in this type it can be further divided into two types, namely personal withdrawals and expenses.
Both types of accounts will be stated as a reduction in equity with a nominal balance in the debit section of the financial statements.
5. Private Pick Up
The fifth type of equity is private taking, private taking is defined as capital taking made by the owner.
Personal withdrawal will be different for each company depending on the type of company, if the company is already in the form of a company then this personal withdrawal can only be done if approved by the board of commissioners.
6. Expenses or Expenses
The last type of equity is expenses or expenses, which are all costs incurred by a company or business to do things that are operational in the production of goods or services.
In equity reporting, these expenses and expenses are not written directly but are listed as profit and loss.
Element of Equity
After getting information about the meaning, purpose and types of equity. You also have to understand what the basics are which then form the equity itself. There are five elements that make up equity, namely:
A. Paid-up capital
The first element that underlies this type of equity is paid-in capital. Paid-up capital is the amount of money deposited by shareholders which can be divided into two, namely:
- Share Capital, which is the nominal number of outstanding shares.
- Agio or Disagio Shares, which is the difference between the shareholder’s deposit and the nominal amount of shares. The difference between premium and disagio is if the premium is the difference above the nominal value while the disagio is the difference below the nominal share. In the balance sheet, an agio will be added to the outstanding share capital and the disagio will be cashed out.
B. Undivided Profit
The second element of equity is undivided profit. Undistributed profit is a collection of profits from previous years that are not divided as dividends, dividends are the distribution of profits to shareholders based on the number of shares owned.
This profit comes from within the company, if this profit has a debit balance on the balance sheet, it will be called a deficit.
This type of unshared profit capital can be requested by shareholders at any time as dividends, therefore it is important for you as the owner of the company to ensure that you have capital reserves from unshared profits.
C. Revaluation Capital
The third element in this type of equity is revaluation capital. Revaluation capital is the difference between the old book value or the previous period with the new book value in the valuation of company assets.
Company activation is all assets owned by the company, either in the form of objects or rights.
D. Donation Capital
The fourth element in the formation of equity is contributed capital. As the name implies, the notion of donated capital is capital that arises because a company or business receives assets from donations.
E. Other Capital
And lastly, the elements that make up equity are other capital, for example, in other capital, there is unshared profit reserve capital, such as reserves for expansion, reserves for declines in inventory prices, and reserves for repayment of bonds.
Examples of Equity in Accounting
Basically equity is a part of accounting, to be able to understand better about equity the information you should get is an example of equity in accounting itself.
For example, in a company in the form of a Limited Liability Company or PT, the equity in the PT is as follows:
- Limited Liability Company capital consisting of shares.
- Shares consisting of; Preferred Shares, Ordinary Shares, as well as Additional Paid-In Capital Accounts.
- Capital from donations can be reported as part of additional paid-in capital.
- Premium or discount from the sale of shares, either common stock or preferred stock.
- Difference in revaluation of fixed assets, for a company that conducts revaluation of fixed assets based on government regulations.
- Retained Earnings (retained earnings or the remaining profit of the previous year) or also the remaining loss of the previous year.
That’s a variety of information about equity which is an important part of accounting, the importance of understanding the types of equity is because you can maximize capital in your business by understanding equity itself.