Equity
In accounting, equity means the residual interest in the assets that remains after deducting liabilities (FASB CON 8 ¶E61).
- Layer
- Lexicon
- Defined in
- Lexicon
- Components
- 1
Authority
This definition follows CON 8, Ch. 4, ¶E61.
Every citation in this system, with the text we read and the date we checked it, is in US GAAP and where these rules come from.
The lessons that teach this
Accounting, 0 to 1 — a free course taught end to end on one month of one company, with the spreadsheet exercises to work it yourself.
- 02The accounting equationAssets = liabilities + equity is not a formula you apply at period end. It is true after every single entry, and that is what makes the books provable.7 min
- 03Accounts, and the five typesEvery account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.9 min
- 11The balance sheetThe other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.10 min
Equity, in use
Quoted from the 7 documents that use the word — what it does to an interface, in the spec's own sentence.
Non-controlling interest appears on both statements — as a component of equity on the balance sheet, and as an allocation of net income on the P&L.
Assets → Liabilities → Equity, with the accounting identity checked and displayed.
Non-controlling interest as an equity component and as a net income allocation.
For founders
The same idea written for a founder: what it costs a startup that ignores it, and what to do in a real month.
- Stock-based compensationOptions and stock granted to employees and contractors are an expense. Each award is measured at its fair value on the grant date and expensed over the period the person has to work to earn it.
- SAFEA simple agreement for future equity. An investor pays now, and the SAFE converts into shares at your next priced round, usually at a valuation cap, a discount, or both. It carries no interest and no maturity date.
- Cap tableThe record of who owns what in the company: common and preferred shares, options, warrants, SAFEs and notes, and the fully diluted total.
- Option poolShares the board sets aside under an equity incentive plan to grant to employees, advisors and contractors as options or restricted stock.
- Priced roundA financing where investors buy shares, usually preferred stock, at a set price per share. Preferred carries rights common doesn't, most often a liquidation preference.
- Liquidation preferenceThe right of preferred stockholders to be paid back before common stockholders when the company is sold or wound up, most often one times what they invested. Non-participating preferred takes that amount or converts to common, whichever pays more.
- Balance sheet explained for startupsAssets equal liabilities plus equity. What each startup line means, from deferred revenue to the SAFE and the accumulated deficit, and why it must balance.
- How to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.
- Audit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.
What it is not called
Each of these is a real word for a different thing. Using it here is what makes a product read as though it was built by someone who has not done the work.
- net worth
- capital alone
Components that render this
The concept is not documentation-only. These are the components that name it in their specification, grouped and stated exactly as the catalog states them.
Also in Foundations
Work with this concept
The calculators that compute it and the ledger payloads that carry it. A definition is where a reader starts; these are where they go next.
- Journal entry for stock-based compensationEach month of the service period, debit Stock-based compensation expense and credit Additional paid-in capital for the grant-date fair value of the awards divided over the vesting period. No cash moves and no liability is created for equity-classified awards.Entry
- Journal entry for issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.Entry
- Journal entry for an owner's drawFor a sole proprietorship or partnership, debit Owner's drawings and credit Cash when the owner takes money out. At year-end, close drawings to capital: debit Owner's capital, credit Owner's drawings. A contribution is the reverse: debit Cash, credit Owner's capital.Entry
Defined in Lexicon. This page is generated from that document, so the two cannot disagree.