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Why Equity is a Liability

Why Equity is a Liability

As shareholders own the equity of a business it is a liability. Equity + current + long term liabilities define how total assets are supported.

Equity as a Liability

Share capital and retained profits are the chief components of shareholders’ funds or equity. As equity is owed to shareholders it is a balance sheet liability.

As such it represents the direct investment in the company made by its shareholders. Retained profits added to this is are recognised as re-investment until such time as they may be distributed as dividends.

Share Premium Account

If shares are sold to an investor, the difference between the face value of the shares sold and the price paid for them will represent a profit. That profit is recorded in the balance sheet as a share premium account. 

A Company Cannot Own Itself

Your company is recognised under the Companies Act as a unique entity in law, independent of shareholders and management.

As equity represents its financial obligation towards its shareholders. it is they who own its resources, not the company.

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