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 is that of the company whose balance sheet is prepared. Now, let’s discuss the top 7 differences on the basis of the following:
Equity is the capital of the business. It is the money that is invested by the owner of the business i.e., the shareholders of the company. 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 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 as 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.
Line items are the presentation items as being shown in 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 in 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 value of the company as a whole. On the other hand, Assets are resources of the company needed to run daily affairs of the enterprise. Current assets are for example very helpful in operating cycle of the revenue.
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.
Link with Income Statement
Assets and Equity both are balance sheet items. However, they are closely linked to profit and loss statement. Retained earnings is 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 income statement which is transferred to accumulated depreciation which is reduced from the historical cost of the asset to show assets at written down value.
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 company||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 company. Owner doesn’t have right over the assets of company.|
|Accounting equation||Equity= Assets- Liabilities||Assets= Equity + Liabilities|
|Balance||It has credit balance||It has debit balance.|
|Presentation in balance sheet||Reflected on the left side i.e., liability side of balance sheet||Reflected on the right side i.e., asset side of 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 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 don’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 loan.|