Entity’s equity

As we have discussed earlier, an entity’s capital or equity is something that the owners have effectively invested into the entity in the form of paying in capital and later on leaving profits undistributed – share capital, reserves and retained earnings comprise the most significant part of equity under normal conditions. An entity’s equity is also labelled as ‘net assets’ of a company reflecting the portion of what’s left of the company once it uses up all its assets to settle its liabilities. 

Changes within equity can both be with a positive and with a negative sign. For one there are actual payments into the share capital and / or reserves based on the need for additional investments for instance or the entity being undercapitalized. Another way to increase an entity’s equity is to leave the earnings undistributed in the sense that they’re accumulated onto ‘retained earnings’.

Changes to equity that are with a negative sign are those where you’d take money out from the net assets – either in the form of paying dividends for instance or simply reducing capital (either share capital or some other reserve accounts).