Did You Know?
In accounting terms, after all liabilities are paid, ownership equity is the remaining interest in assets. If valuations placed on assets do not exceed liabilities, negative equity exists.
Shareholders’ equity (or stockholders’ equity, shareholders’ funds, shareholders’ capital employed) is this interest in remaining assets, spread among individual shareholders of common or preferred stock.
At the start of a business, owners put some funding into the business to finance assets. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for, the positive remainder is deemed the owner’s interest in the business.
This definition is helpful when a business is not paying its bills and gets liquidated, wound up, put into receivership or bankruptcy. Then, a series of creditors, ranked in priority sequence, have the first claim on the proceeds (e.g. asset sales), and ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such a case, creditors may not get enough money to pay their bills, and nothing is left over to reimburse owners’ equity. Thus owners’ equity is reduced to zero. Ownership equity is also known as risk capital, liable capital and equity.
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Originally posted 2009-04-19 21:50:50.