There are three concrete parts to the Balance sheet. The parts comprise 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 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 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 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 include 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 company’s value as a whole.
On the other hand, Assets are the company’s resources 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, are 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 an 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. In contrast, fixed assets are reported at historical cost, i.e., gross fixed assets less accumulated depreciation, to arrive at a written-down value. A similar case is for amortization which applies to intangible assets.
Comprehensive differences between Equity and Assets
The differences between equity and assets, including the above top 7 differences and others, are given below:
|Basis of difference
|It is the money invested by owners in the business.
|They are the resources controlled by the entity.
|Used for buying assets or discharging debts of the company
|It gives economic benefits to the entity
|Classified as fixed assets and current asset
|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.
|Equity= Assets- Liabilities
|Assets= Equity + Liabilities
|It has a credit balance
|It has a debit balance.
|Presentation in the 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
|It is a personal account
|It is a real account.
|It is based on the 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.
|There is no appreciation in equity.
|Assets value gets appreciated in due course of time.
|Equity doesn’t get depreciated.
|There will be a gradual decline in its value due to depreciation.
|Equity comprises capital, retained earnings, reserves, and surplus.
|Assets comprise land and building, cash and cash equivalent, receivables, etc.
|Equity is the source of funds to acquire resources.
|It is the resource required to operate a business.
|It is reported at book value.
|It depends on whether the asset will be recorded at book or market value.
|Equity can’t be kept as collateral for the loan.
|Assets are kept as collateral for the loan.
Is equity an asset?
Yes, equity is considered an asset. Equity is a type of financial asset representing ownership in a business, and it has intrinsic value that can be realized through capital gains or dividends distributions.
Equity can be held in the form of common or preferred shares, and the asset value of equity can increase or decrease depending on a company’s performance.
What is the difference between equity and liabilities?
Equity and liabilities are terms used to describe different aspects of an organization’s financial structure. Equity is an asset representing ownership in a business, whereas liabilities are obligations owed by the company.
Equity can be held in the form of common or preferred shares and can either increase or decrease in value depending on the company’s performance. These assets give owners voting rights and potential capital gains from dividend distributions.
On the other hand, Liabilities represent money owed by a business to its creditors. This could include loans taken out by the company, taxes owed to government entities, or payments due to suppliers or customers.
It is important for organizations to keep track of their liabilities as they must make payments on them to maintain good standing with creditors and avoid penalties or damage to their credit rating.
When understanding an organization’s financial structure, equity and liabilities are very different concepts. Equity represents ownership in a company, while liabilities denote obligations owed by it.
Knowing the difference between these terms is essential for proper business management and financial planning.