Equity

Question 1

What is Equity?

Answer 1

the residual interest in the assets of the entity after deducting all its liabilities

Equity = Assets - Liabilities

Question 2

Recognition of Equity

Answer 2

No special recognition criteria for equity because the amount of equity depends on recognition of assets/liabilities

Question 3

Types of Equity

Answer 3

○ Capital contributed to the organisation by the owners

○ Reserves
- Profit Based Reserves
□ Retained earnings/ unappropriated profits/profit and loss appropriation
□ Other titles (general R, dividend equalisation R)

○ Appropriations to the owners
- Dividends, drawings, share-buy backs

Question 4

equity classifications appearing on the balance sheet will vary between entities

Answer 4

Sole Trades & Partners
○ Profit/Loss and Drawings contributing directly to equity

Companies
○ Retained earnings
Reserves

Question 5

Examples of equity classifications

Answer 5

• Share Capital
• Retained Earnings
• Reserves

Question 6

Share Capital

Answer 6

funds contributed to a company by the owners

Question 7

Types of share capital

Answer 7

Paid-up share capital
□ Total amount paid by shareholders for shares issued in the company

Contributed capital
□ Funds contributed to a partnership or sole trader by the owner

Question 8

Retained earnings

Answer 8

• Cumulative profits that have not been distributed as dividends or transferred to reserve accounts
• Funds are reinvested into the business

Question 9

Reserves

Answer 9

A component of equity that takes many forms

□ Asset revaluations
□ Transfers of profits
□ Movements in exchange rates