There are three concrete parts to the Balance sheet. The parts comprise of assets, liabilities, and Equity. These three parts are also based on the accounting equation is:
Shareholder’s equity= Assets – Liabilities
In simple words, the primary difference is that equity is the investors’ resources in the company, and assets are that of the company whose balance sheet is prepared. Now, let’s discuss the top 7 differences based on the following:
Equity is the capital of the business. It is the money invested by the owner of the business, i.e., the company’s shareholders.
In other words, equity can be defined as the assets which are created by the company after discharging its liabilities. It is always shown on the liabilities side of the balance sheet. It has a credit balance.
Assets are the resources controlled by the entity from which the future economic benefits are expected to flow to the enterprise.
Examples include land and building, furniture, debtors, stock, cash in hand, etc. Assets are shown on the debit side of the balance sheet.
Equity is two types with various iterations in them in terms of features. These are equity share capital and preference share capital. The retained earnings are attributable to equity shareholders. Hence, it also forms part of equity. Equity is also termed stockholders’ equity.
Assets can be classified as tangible assets (can be touched) and intangible assets (can’t be touched). Examples of tangible assets are land and building, furniture, etc.
Examples of intangible assets are goodwill, patents, copyright, trademark, etc. Assets are the application of funds hence;, they have a debit balance.
3) Line Items
Line items are the presentation items as being shown in the balance sheet. Equity consists of contributed capital, treasury stock, preferred shares, and retained earnings.
It is shown on Liabilities and Capital Side and under journal entries, these items are always credit items.
While making journal entries, assets are always debited unless there is a decline in assets. Assets consist of Non-current Assets and Current assets.
Non-current assets consist of fixed assets and intangible assets. Current assets consist of cash and cash equivalent, inventory, accounts receivables, and prepaid expenses.
Equity is the kind of fund invested by the shareholders’ to accrete value i.e. generate profits and optimize the value of the company as a whole.
On the other hand, Assets are the resources of the company needed to run the daily affairs of the enterprise. Current assets are for example very helpful in the operating cycle of the revenue.
5) Accounting Equation
The fundamental concept of the accounting equation is based on
Assets = Liabilities + equity
Here, Equity can be derived by subtracting liabilities from assets. Assets on the other hand is the sum of equity and liabilities.
6) Link with Income Statement
Assets and Equity are both balance sheet items. However, they are closely linked to profit and loss statements. Retained earnings are part of equity. Every year, the net profits are transferred to retained earnings after making the required payment of dividends.
On the other hand, depreciation is operating expense in the income statement, which is transferred to accumulated depreciation, which is reduced from the asset’s historical cost to show assets at written down value.
7) Depreciation & amortization
There is no depreciation in the equity. While fixed assets are reported at historical cost i.e. gross fixed assets less accumulated depreciation to arrive at written down value. A similar case is for amortization which is applicable for intangible assets.
Comprehensive differences between Equity and Assets
The differences between equity and assets including above top 7 differences and others are given below:
|Basis of difference||Equity||Assets|
|Definition||It is the money invested by owners in the business.||They are the resources controlled by the entity.|
|Purpose||Used for buying assets or discharging debts of the company||It gives economic benefits to the entity|
|Categorization||No category||Classified as fixed assets and current asset|
|Ownership||Equity is the fund of the owner.||Assets are the property of the company. The owner doesn’t have right over the assets of the company.|
|Accounting equation||Equity= Assets- Liabilities||Assets= Equity + Liabilities|
|Balance||It has credit balance||It has a debit balance.|
|Presentation in balance sheet||Reflected on the left side, i.e., the liability side of the balance sheet||Reflected on the right side, i.e., the asset side of the balance sheet|
|Accounts type||It is personal account||It is a real account.|
|Accounting principle||It is based on principle of Cr the giver.||It is based on what comes in.|
|Reduction in value||There is no reduction in value.||There is a reduction in value due to wear and tear.|
|Appreciation||There is no appreciation in equity.||Assets value get appreciated in due course of time.|
|Depreciation||Equity doesn’t get depreciated.||There will be a gradual decline in its value due to depreciation.|
|Line items||Equity comprises capital, retained earnings, reserves, and surplus.||Assets comprise land and building, cash and cash equivalent, receivables, etc.|
|Nature||Equity is the source of funds to acquire resources.||It is the resource required to operate a business.|
|Reporting||It is reported at book value.||It depends on the asset whether it will be recorded at book value or market value.|
|Collateral||Equity can’t be kept as collateral for the loan.||Assets are kept as collateral for the loan.|