Equity

Meaning

Equity (حقوق الملكية) is the owners' share of the business, the third part of the balance sheet: assets equal liabilities plus equity. It is made of the capital the owners paid in, any reserves the articles of association or a shareholders' resolution set aside, and retained earnings, the profits kept rather than distributed. Drawings by a sole proprietor or dividends to partners reduce it; profits increase it.

Equity is a residual, not a pot of cash: it is what would be left for the owners if every asset were realised at its book value and every liability paid. In Saudi Arabia it matters beyond the balance sheet. It is a large part of the zakat base, and when a company's losses reach half its capital the Companies Law requires the managers or board to act.

Also called: owners' equity · shareholders' equity · net assets · حقوق الملكية

Example

Al Noor Trading has assets of 1,900,000.00 and liabilities of 700,000.00, so its equity is 1,200,000.00: capital of 400,000.00 paid in by the partners and retained earnings of 800,000.00. If it pays the partners a dividend of 200,000.00, cash and equity both fall by 200,000.00 and equity becomes 1,000,000.00.