What is Equity Vs Assets?
The primary difference between Equity and Assets is that equity is anything invested in the company by its owner that provides them a stake or ownership in the company. In contrast, the asset is anything that the company owns to provide economic benefits in the future. The understanding and maintenance of both these concepts help a company maintain a fool-proof financial record.
Equity is obtained by subtracting liabilities from assets, whether owner's equity or shareholder's equity. Assets are defined as those that help the business manufacture and generate operating revenues. Even though, both are financial terms and have a complementary relationship with each other, it is pivotal to understand their differences and relationship with liabilities which together form the accounting equation of the company.
Table of contents
- Difference Between Equity and Assets
- What is Equity?
- What are Assets?
- Equity vs. AssetsInfographics
- Key Differences Between Equity and Assets
- Comparison Table
- Conclusion
- Recommended Articles
Equity Vs Assets Explained
Both equity and assets are financial terms that in combination with liabilities form the accounting equation of the company. Equity refers to a percentage of ownership of an owner in exchange for a certain amount of funds. Assets, on the other hand, refer to the machinery, infrastructure, and other things that the company owns that provide them with profits for the foreseeable future.
Both equities and assets are part of the balance sheet. The accounting equation used to equate the balance sheet is assets equal liabilities plus equity. Equity is the source of the funds required to create assets to run and grow a business.
On the other hand, assets are economic resources necessary to run the business. Assets can be classified as fixed assets or current assets based on the liquidity of the assets. All three financial statements connect with the various line items of both assets vs. equities.
It is common confusion if equity can be an asset among most students. Even though assets and equity are similar, neither of the two concepts is a subset of the other. In fact, they form one-third of the accounting equation which is completed by liabilities. Liabilities refer to the financial obligations that are outstanding on behalf of the company that are settled through the revenue generated.
What is Equity?
Whenever a company owner decides to start a business, it requires resources to buy property, machinery, and other things to manufacture products and start and run the business. There are two sources of funds to buy all the assets required to run a business. One of the sources of funds is debt, and the other sources of funds are equity. Equity is part of the sources of funds that the owners of the company fund. Owner's equity or shareholders' equity is part of the balance sheet by subtracting liabilities from assets. Equity comprises various other subparts that add up to the owner's equity. They are contributed capital, retained earnings, treasury stocks, preferred shares, and share of minority interest, which is also known as non-controlling interest.
What are Assets?
Assets are the resources required by the business to run and grow the business. Assets are part of a company that helps the business manufacture products and generate operating revenue. Many line items in the balance sheet add up together to form the total assets in the balance sheet. Those line items are cash and cash equivalents, which comprise cash, and short-term financial assets, as liquid as cash. Assets also include all machinery, property, and plant, mainly hard assets, which are reported as gross fixed asset, which consists of the component of depreciation. Cash and PPE form a significant part of assets for a business.
Other assets comprise accounts receivable, deferred tax assets, financial assets, and prepaid expenses. The asset side of the balance sheet also includes intangible assets; one of the popular intangible assets is goodwill, which is created while acquiring a new company. These are the most valuable assets though the list is not comprehensive.
The accounting equation followed is:
Assets= Liabilities + Equity
Equity vs Assets Infographics
Let us understand the differences between assets and equity with the help of visual representation through the infographics below.
Key Differences
Now that we understand the basics of both these accounting concepts individually and the differences through the infographics, let us discuss the key differences of these two accounting concepts through the points below.
- Equity comprises contributed capital, retained earnings, treasury stocks, preferred shares, and shares of minority interest. Assets are cash and cash equivalent, property, plant, equipment, account receivables, deferred tax assets, and intangible assets.
- Equity is not affected by depreciation, whereas depreciation impacts the assets. Gross fixed assets, together with depreciation from net fixed assets.
- Equity is the fund required to create the resources, whereas assets are those resources required to run a business.
- A balance sheet to balance equities can be achieved by subtracting equities from liabilities. We obtain assets by summing up assets and the liabilities on the balance sheet.
- While reporting equity, it is reported as the balance in book value. It is entirely on each asset, whether it should be reported on market value or book value in the balance sheet.
- There is no classification of equities, but assets can be classified as either tangible or intangible assets.
Comparison Table
To further reiterate the differences and explain the concept in detail, let’s put equity and assets head-to-head in a comparison table to understand their differences.
| Basis | Equity | Assets |
|---|---|---|
| Definition | Owner's equity or shareholders equity is part of the balance sheet by subtracting liabilities from assets. | Assets are part of a company that helps the business manufacture products and generate operating revenue. |
| Line Items | It comprises contributed capital, retained earnings, treasury stocks, preferred shares, and a share of minority interest. | Assets include cash and cash equivalent, property plant and equipment, deferred tax, accounts receivables, tax assets, and intangible assets. |
| Depreciation | There is no effect of depreciation in equity. | Fixed assets are reported in the balance sheet as gross fixed assets and are netted with accumulated depreciation to come up with net fixed assets. |
| Nature | Equity is the source of funds required to create the resources. | Assets are the resources required to run a business. |
| Accounting Equation | When following the accounting equation to balance the balance sheet, equity can subtract liabilities from equities. | Assets are arrived at by summing up assets and liabilities on the balance sheet. |
| Link with Income Statement | Retained earnings, part of equity, increase every quarter as the net income after paying a dividend is added to retained earnings. | Depreciation is an operating expense in the income statement. Assets in the balance sheet are depreciated, either using a simple method or the DDM method every quarter. |
| Market value or Book value | Equity is reported in the balance in book value. | It depends on the individual asset and whether an asset is reported on market value or book value on the balance sheet. |
| Classification | No such classifications can be done in the case of equities. | It depends on the individual asset and whether an asset is reported on market value or book value on the balance sheet. |
Recommended Articles
This article is a guide to Equity vs. Assets. Here we discuss the top differences between Equity and Assets along with infographics and a comparison table. You may also have a look at the following articles –
- Examples ofOwner's Equity
- Top Differences BetweenShares vs. Debentures
- Assessed Value and Market Value
- Shareholders Equity Statement Meaning
