---
title: "Equity"
description: "What equity means in accounting: the residual interest of owners, its components (share capital, reserves, retained earnings) and how profit and dividends change it."
canonical: https://ledgeriano.com/glossary/equity
language: en
publisher: "Ledgeriano"
updated: 2026-11-06
---

# Equity

> What equity means in accounting: the residual interest of owners, its components (share capital, reserves, retained earnings) and how profit and dividends change it.

Equity is the owners' residual interest in a business: what is left of the assets after all liabilities are deducted. It is made up of capital contributed by owners, reserves and retained earnings. Equity has a credit normal balance and grows with profit and new capital, and shrinks with losses and distributions to owners.

For a company, equity usually shows **share capital**, legal or other **reserves**, and [retained earnings](https://ledgeriano.com/glossary/retained-earnings), the accumulated profit not yet distributed. For a sole trader it is a single capital account plus the year's profit, less drawings.

Revenue and expense accounts are temporary equity accounts: at year end the [closing entry](https://ledgeriano.com/glossary/closing-entry) moves their net result into retained earnings. The [statement of changes in equity](https://ledgeriano.com/glossary/statement-of-changes-in-equity) explains every movement during the year.

```
Equity = Assets - Liabilities
Closing equity = Opening equity + Net income + New capital - Dividends
```

## Example: equity over one year

A company starts the year with 80,000 of equity. It earns net income of 25,000, raises 10,000 of new share capital and pays dividends of 15,000. Closing equity is 80,000 + 25,000 + 10,000 - 15,000 = 100,000.

### Is equity the same as the company's value?

No. Equity is a book value based on accounting measurements. The market value of a business depends on expected future cash flows and can be far higher or lower.

### Can equity be negative?

Yes. When accumulated losses exceed the capital invested, liabilities are larger than assets and equity becomes negative, which is a serious warning about solvency.

Guide: https://ledgeriano.com/guides/financial-statements