Equity is what the owners of a business are left with once everything it owes is settled - assets minus liabilities. It is also called owner's equity or net assets. Equity is the balancing figure in the accounting equation: assets equal liabilities plus equity.
What it means
Equity is built from two main sources: capital the owners put in and profit the business keeps rather than distributes (retained earnings). It rises when the business makes a profit or owners inject funds, and falls when it makes a loss or pays out dividends. A credit increases equity; a debit decreases it.
Where it fits in
Payroll affects equity indirectly. Salary and wage costs reduce profit on the income statement, and that profit flows into retained earnings within equity. So every pay run, through its effect on profit, ultimately moves the equity line on the balance sheet.
Key rules
- Equity equals assets minus liabilities.
- It comprises contributed capital plus retained earnings.
- Profit increases equity; losses and distributions reduce it.
- Credits increase equity; debits decrease it.
