Quick answer
Equity is the residual interest in an entity’s assets after deducting its liabilities. It changes through owner contributions and distributions, profit or loss, other comprehensive income (OCI) where applicable, and specified direct adjustments. OCI contains only particular items that the governing framework presents outside profit or loss.
Equity is the owners’ claim on the net assets—not a separate pool of cash. A profitable company can have little cash, and a cash-rich company can have substantial liabilities. Equity is the balancing residual after recognized assets and obligations are measured.
Major components
Contributed equity
Amounts arising from transactions with owners, including qualifying share issues. Share Capital explains how those issues create contributed equity.
Retained earnings
Accumulated profit and loss after distributions and specified adjustments. Retained Earnings and Dividends explains the rollforward.
Other components
Separate reserves or accumulated other comprehensive income (OCI) balances can arise from particular transactions and framework requirements. They are generally presented separately from retained earnings while the applicable framework requires that distinction; a specific requirement may later allow or require a transfer or reclassification.
Performance and owner transactions
Profit can increase equity, but issuing shares is not revenue. A dividend reduces equity, but it is not an expense. That distinction lets readers separate results generated by the business from financing decisions made with owners. Revenue and expenses reach retained earnings through profit or loss; an owner contribution increases contributed equity directly; a declared dividend reduces retained earnings and may create a payable before cash leaves.
Separate business performance from owner financing
Cedar Workshop Ltd. begins the year with $70,000 of equity. During the year, shareholders invest another $25,000, the company earns $18,000 of profit, and it validly declares a $6,000 dividend. Assume there are no OCI items or direct adjustments.
Closing equity is $70,000 + $25,000 + $18,000 − $6,000 = $107,000. The increase has two distinct sources: the period’s profit added $18,000, while transactions with owners added a net $19,000.
Financial-statement effect
Scroll horizontally to see all columns.
| Statement | Account | Effect |
|---|---|---|
| Income statement | Profit | Reports $18,000 profit; owner transactions are excluded |
| Statement of changes in equity | Contributed equity | Increases by the $25,000 owner contribution |
| Statement of changes in equity | Retained earnings | Increases by $18,000, then decreases by the $6,000 dividend |
| Balance sheet | Total equity | Ends at $107,000 |
- Income statement
- AccountProfit
- EffectReports $18,000 profit; owner transactions are excluded
- Statement of changes in equity
- AccountContributed equity
- EffectIncreases by the $25,000 owner contribution
- Statement of changes in equity
- AccountRetained earnings
- EffectIncreases by $18,000, then decreases by the $6,000 dividend
- Balance sheet
- AccountTotal equity
- EffectEnds at $107,000
Other routes into equity
Measurement changes do not all follow the same route. Some affect profit or loss, some qualifying items are reported in other comprehensive income, and a retrospective correction of a prior-period error can adjust opening equity directly. The applicable framework and the underlying transaction determine the route; the label “equity” does not explain it by itself.
Equity presentation and disclosure
The balance sheet reports closing equity at one date. The Statement of Changes in Equity reconciles each component across the period. The Other Comprehensive Income article explains why some specified performance items affect separate accumulated equity components rather than retained earnings.
ASPE reserves within equity
ASPE uses reserve narrowly for an appropriation within equity: an amount designated within owners’ interest for a stated purpose. It is not a liability, contingency, or loss already incurred. Section 3260 keeps creation and release of that reserve out of net income and shows its source and changes separately. Section 3610 applies the same performance-versus-owner boundary more broadly by excluding capital transactions from net income and presenting them separately.
Negative equity
Equity can be negative when recognized liabilities exceed recognized assets. The accounting equation still balances; the negative residual signals the entity’s obligations exceed the carrying amount of its resources at that date. It does not by itself determine solvency or valuation.
Carrying amount and market value
Reported equity is built from the recognized and measured amounts in the financial statements. It is not a valuation of the company or a promise of what shareholders would receive on sale or liquidation. Unrecognized internally generated value, measurement bases, taxes, transaction costs, creditor priority, and the rights of different share classes can all make economic value differ from the balance-sheet residual.