Shareholders Equity - Essay

Describe share holder’s equity
of a sole proprietor, partnership
and company

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Share holder's equity for sole proprietors....................................................................................1
Share holder's equity for partnership ..........................................................................................2
Share holder's equity of company...............................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
For a business organisation, in financial terms, shareholder's equity refers to difference
between its assets and liabilities. It shows the financial capacity of a business organisation. Share
capital, stake holder's equity, net worth, etc. are synonym of shareholder's equity. This essay
contains a brief description regarding shareholder's equity of different structures like sole
proprietor, partnership and company.
MAIN BODY
Share holder's equity
Share holder's equity can be termed as a difference between total assets and total
liabilities any business organisation. It is a capital that has been retained by business in addition
to difference of retained earning and treasury shares. It can also be termed as book value of a
business. It shows the economic condition of an organisation (Vătavu, 2015).
Share holder's equity for sole proprietors
Sole proprietor's business is that which is owned and controlled by a single person.
Equity section of sole proprietor consists a single account namely capital account. It refers to
direct investment of owner in the company. Generally, capital is invested in the company at the
beginning of year. However, it can be contributed in cash or in kind.
In sole proprietorship, there is an absence of shareholder's capital. Therefore, in sole
proprietor, it is instead termed as owner's equity.
Owner's equity for sole proprietor can be calculated using the following formulae
Owner's equity = total assets – total liabilities
In this regard, owner's equity can be influenced in the business by more investment made
by owner, profit or loss of business, when oner withdraws money from the business, or increase
or decrease in the amount of assets or liabilities held by business (Abor, 2017).
For example, if a sole proprietor starts a business with assets worth$ 2000, borrowings
worth $800 , its shareholder's equity will be calculated as under:
total assets – total liabilities = shareholder's equity
2000 – 800 = 1200
Therefore, owner will contribute money worth $1200 to start its sole proprietorship.
Shareholder's equity account in sole proprietorship
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In sole proprietorship, it is termed as owner's equity account. It is a capital account, net
amount of owner's investment in the business (Schmidt, 2016). It is a reflection of net income at
the end of period.
Share holder's equity for partnership
Partnership is a business structure which is owned by more than an owner called partners.
In partnership business, ion order to identify total investment of owners, partners prepare capital
account. In partnership, there is absence of shareholders, therefore, in partnership business,
shareholder's equity is termed as partner's capital account rather than shareholders' equity
account.
In partnership, business prepares partnership account of each partner. Therefore, number
of partnership capital account is equal to number of partners in the partnership business.
Typically, in partnership, each partner has two types of account namely capital account and
current account (Lasa, Takim and Ahmad, 2018). Partner's capital account shows the money
invested by partners in the partnership business. Whereas, on the other hand, partner's current
account shows the accumulated share of partners in the profit of partnership business.
Partner's capital can be influenced when they withdraw money from the business for
their personal use. However, this money reflects partner's current account (What Is Partnership
Equity?, 2019).
Therefore, amount of partner's capital can be calculated as:
Partner's capital = money contributed - drawings
And total amount of partnership capital can be calculated by adding the total amount of
contribution of each partner in the business (PintArelli, Wishne, and Kizer, 2017.).
For example, if A, B and C starts partnership business by contributing amount worth
$10000, $15000 and $8000, the total amount of equity of partnership business will be:
A's contribution $10000
B's contribution $15000
C's contribution $8000
Total equity $43000
In this way, total equity of partnership business is being calculated.
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Share holder's equity of company
Company is a business structure which is owned by its shareholders. Company's
shareholders are its true owners. The main objective of business of any company is to enhance its
shareholder's equity. Shareholder's equity of company is shown in its balance sheet (Phalippou,
Rauch and Umber, 2018).
Shareholder's equity also reflects the financial position of any company. Amount of
shareholder's equity can be influenced by the company in may ways like, buy back of shares,
forfeiture of shares, increasing value of each shares, etc.
In a company, amount of shareholder's equity can be calculate by differentiating total
assets and total liabilities of the company. Shareholder's equity shows the efficiency of
management in running business of company (Cao, 2015). Management's efficiency of decision
making, enhancing profits, reducing costs, directly effects the value of shareholders of the
company.
Shareholder's equity in company can be increased by paying the shareholders' dividend
out of profits earned by the company during the year. Although, in case of huge loss, or
condition of winding up, shareholders are liable to pay amount equal to their share in the
company.
Amount of shareholder's equity includes amount of shares held by share holders, paid up
share capital, dividend paid to share holders, etc. although, in general sense, amount of share
holders equity can be calculated by differentiating company's total assets and total liabilities
(Shareholders Equity, 2019).
Formula for calculating shareholder's equity of company can be formulated as:
Share holder's equity = total assets – total liabilities
For example, a company urban pvt. Ltd. has been started with assets worth $15000. it
borrowed money from bank worth $8000 for running its business. What will be its shareholder's
value?
In the above example, company has total assets of $15000, also, it has a liability worth
$8000. Therefore, its share holder's equity can be calculated as:
share holder's equity = total assets – total liabilities
Or, $15000 - $8000.
Therefore, its share holder's equity will be worth $7000.
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CONCLUSION
From the above essay, it can be concluded that shareholder's equity is nothing but the
money invested at the beginning of the year for smooth running of the business. In different
business structure, it is termed by different names like, owner's capital, partners' capital, etc. In
general sense, it is difference between net assets and net liabilities of business, and the main
objective of any business is to enhance its shareholder's capital, as it reflects the economical and
financial soundness of the business entity.
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REFERENCES
Books and Journals
Abor, J.Y., 2017. New Venture Development and Sources of Financing. In Entrepreneurial
Finance for MSMEs (pp. 21-50). Palgrave Macmillan, Cham.
Cao, Y and et.al., 2015. Company reputation and the cost of equity capital. Review of
Accounting Studies. 20(1). pp.42-81.
Lasa, Y.M., Takim, R. and Ahmad, N., 2018. Sources of Financing for Public Private
Partnership Projects: Lesson Learnt from Malaysia. Indian Journal of Science and
Technology. 11(20).
Phalippou, L., Rauch, C. and Umber, M., 2018. Private equity portfolio company fees. Journal
of Financial Economics.
PintArelli, J.A., WishneW, J.A. and Kizer, M., 2017. Equitable or Equity Committees: Lessons
from Recent Cases. Energy.21. p.6.
Schmidt, L.R., 2016. Sign on the Dotted Line. Iowa Law. 76. p.14.
Vătavu, S., 2015. The impact of capital structure on financial performance in Romanian listed
companies. Procedia Economics and Finance. 32. pp.1314-1322.
Online
Shareholders Equity. 2019. [ONLINE] Available through
<https://www.readyratios.com/reference/accounting/shareholders_equity.html>
What Is Partnership Equity?. 2019. [ONLINE] Available through
<https://smallbusiness.chron.com/partnership-equity-64265.html>
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