Entity’s capital – equity and loan payables

Capital of an entity is divided into two – internal and external capital. An internal capital is owner’s equity and external capital is what third party has “paid into the entity”. Normally loans given and not supplier payables are defined as external capital. The reason for that lies behind the subject matter – supplier payables are operations related whereas loans are taken for further investments either for expanding the business, buying new equipment etc. 

Owner’s equity is on the passive side of a company’s balance sheet. It’s not something the entity has to pay up or really owns, but it’s the amount invested into the company by the owners. If you think about the balance sheet, there are assets, which the company has the right to use for its business, there are liabilities (including loan payables) the company owes to its suppliers and then there’s equity. Some say that it shows how strong a company’s position is and some consider having too much equity is bad. That’s a matter to be discussed separately as it’s a matter of flavor. Do note that your entity’s equity should always meet regulatory requirements.

As a matter of fact, equity itself comprises of various components – share capital, reserves (i.e. for statutory purposes and other reserves, including voluntary) as well as retained earnings and current period’s result. Share capital is a fixed amount paid into the company when initially incorporating the entity and if decided so, can be increased or decreased. In addition, when situation arises so, there may be need for reserves. Something that’s just a mathematical sum is retained earning – it’s the profits (and losses) added up from prior periods. Retained earning is something you pay dividends out of.

Now as for the external capital, loan liabilities taken upon, they’re third party investments made into the company, which the entity needs to pay up eventually.