Balance sheet 101: Understanding equity

The final part of the balance sheet deals with an issue that is probably the simplest part of this financial statement. Shareholders' Equity or just Equity is all that actually matters. Conceptually, it is the difference between the assets and liabilities owned by the company and therefore, represents the company's net worth. But before we understand the components of shareholders' equity, let's first understand what equity actually means. Every business needs capital, which can be of two types - debt capital and equity capital. Since a start-up is unlikely to have debt capital, the only capital available to it is equity capital. And suppliers of this capital are residual owners of the company. This term (residual owners) implies that if the company goes bankrupt, its shareholders will get money from the sale of assets only after all the claims of debt holders are fully satisfied. This structure underscores the basic principles of finance: the greater the risk, the greater the expected return. Even if a company performs really well, debt holders will receive only the