What is the difference between equity and assets?
"Accounts track value: at any given time, a given account will have a given value. The type of account indicates what the value represents. Roughly: On a balance sheet (a listing of accounts and their values at a given point in time), there is typically only one equity account, representing net worth, I don't know much about GNUCash, though. Income and expenses accounts do not go on the balance sheet, but to find out more, either someone else or the GNUCash manual will have to describe how they work in detail. Equity is more similar to a liability than to assets. The equation Assets = Equity + Liabilities should always hold; you can think of assets as being ""what my stuff is worth"" and equity and liabilities together as being ""who owns it."" The part other people own is liability, and the part you own is equity. See balance sheet, accounting equation, and double-entry bookkeeping for more information. (A corporate balance sheet might actually have more than one equity entry. The purpose of the breakdown is to show how much of their net worth came from investors and how much was earned. That's only relevant if you're trying to assess how a company has performed to date; it's not important for a family's finances.)" "Equity does not represent production divisions in a company (i.e. chocolate, strawberry, and vanilla does not make sense).  In Sole proprietorship, equity represents 1 owner.  In Partnership, equity has at least two sub-accounts, namely Partner 1 and Partner 2.  In Corporations, equity may have Common Stockholders and Preferred Stockholders, or even different class of shares for insiders and angel investors.  As you can see, equity represents who owns the company. It is not what the company does or manufactures.  First and foremost, define the boundary of the firm. Are your books titled ""The books of the family of Doe"", ""The books of Mr & Mrs Doe"", or ""The books of Mr & Mrs Doe & Sons"".  Ask yourself, who ""owns"" this family. If you believe that a marriage is perpetual until further notice then it does not make any sense to constantly calculate which parent owns the family more. In partnership, firm profits are attributed to partner's accounts using previously agreed ratio. For example, (60%/40% because Partner 1 is more hard working and valuable to the firm.  Does your child own this family? Does he/she have any rights to use the assets, to earn income from the assets, to transfer the assets to others, or to enforce private property rights? If they don't have a part of these rights, they are certainly NOT part of Equity.  So what happens to the expenses of children if you follow the ""partnership"" model? There are two ways. The first way is to attribute the Loss to the parents/family since you do not expect the children to repay. It is an unrecoverable loss written off. The second way is to create a Debtor(Asset) account to aggregate all child expense, then create a separate book called ""The books Children 1"", and classify the expense in that separate book.  I advise using ""The family of Doe"" as the firm's boundary, and having 1 Equity account to simplify everything. It is ultimately up to you to decide the boundaries." "Not to detract from the other answers at all (which are each excellent and useful in their own right), but here's my interpretation of the ideas: Equity is the answer to the question ""Where is the value of the company coming from?""  This might include owner stakes, shareholder stock investments, or outside investments.  In the current moment, it can also be defined as ""Equity = X + Current Income - Current Expenses"" (I'll come back to X). This fits into the standard accounting model of ""Assets - Liabilities = Value (Equity)"", where Assets includes not only bank accounts, but also warehouse inventory, raw materials, etc.; Liabilities are debts, loans, shortfalls in inventory, etc.  Both are abstract categories, whereas Income and Expense are hard dollar amounts.  At the end of the year when the books balance, they should all equal out. Equity up until this point has been an abstract concept, and it's not an account in the traditional (gnucash) sense.  However, it's common practice for businesses to close the books once a year, and to consolidate outstanding balances.  When this happens, Equity ceases to be abstract and becomes a hard value: ""How much is the company worth at this moment?"", which has a definite, numeric value. When the books are opened fresh for a new business year, the Current Income and Current Expense amounts are zeroed out.  In this situation, in order for the big equation to equal out: Assets - Liabilities = X + Income - Expeneses the previous net value of the company must be accounted for.  This is where X comes in, the starting (previous year's) equity.  This allows the Assets and Liabilities to be non-zero, while the (current) Income and Expenses are both still zeroed out.  The account which represents X in gnucash is called ""Equity"", and encompasses not only initial investments, but also the net increase & decreases from previous years.  While the name would more accurately be called ""Starting Equity"", the only problem caused by the naming convention is the confusion of the concept Equity (X + Income - Expenses) with the account X, named ""Equity""."
Where we’re going, we don’t need profits Twitter Facebook LinkedIn Print this page 15 SEPTEMBER 19, 2017 By: Alexandra Scaggs Simply put, earnings no longer reliably reflect changes in corporate value and are thus an inadequate driver of investment analysis. – Profs Feng Gu and Baruch Lev, in a paper for the CFA Institute’s Financial Analysts Journal Well then!  This idea challenges the very heart of traditional equity-market investment analysis. The authors point out that legendary stock-picker Benjamin Graham spent hundreds of pages of his 1962 book on analysing and predicting earnings and other quarterly metrics. Earnings prediction is still central to most sell-side analysis as well.  But if profits, EBITDA or sales were truly central for corporate valuation, wouldn’t markets punish regular loss-makers like Tesla and Amazon more severely? And wouldn’t there be a stronger return to predicting profits?  The returns to such predictions have diminished over time, according to the authors of the paper, which might help explain the persistent underperformance by active fund managers. While the professors commit a minor chart crime below by starting the Y-axis at 1.5 per cent, it seems notable that potential gains were lower during the 2009 downturn than during the dot-com bust:  The 30-year pattern of the gains from the earnings growth investment strategy is depicted in Figure 2. Again, the deterioration of gains from perfect growth prediction is evident. Clearly, the problem lies with reported earnings, not in the way investors use them. Simply put, earnings no longer reliably reflect changes in corporate value and are thus an inadequate driver of investment analysis.  The decline in profits’ importance can be explained by a fundamental change in the way companies create value, they say.  There are lots of names for the change: The information revolution, the rise of the knowledge economy, and so on. No matter what you call it, the idea is that modern production relies less on physical capital and more on intellectual capital.  Accounting and financial analysis methods have failed to adapt to this change, they say. For example, companies are required to expense R&amp;D and sales expenses immediately, while they can amortise expenses from capital investment and acquisitions (including intangibles) over time. They argue those rules penalise the important methods of modern value creation, since R&amp;D costs create lasting returns from new products and SG&amp;A expenses create lasting returns from new customers.  Of course, one person’s “internally generated intangibles” can be another’s “overpaid salesforce”. But the difference in accounting treatment between those costs and acquired intangibles can make it difficult to compare within industries:  Thus, a company pursuing an innovation strategy based on acquisitions will appear more profitable and asset rich than a similar enterprise developing its innovations internally. Consequently, reported earnings, assets, and market multiples (P/E, book-to-market ratio) cannot be compared within industries, and earnings definitely do not reflect intrinsic value creation. And as far as we can tell, the professors aren’t lobbying to start amortising all sales costs and executive compensation. Instead, they say we should stop looking at the consequences of corporate value creation — the quarterly reports — and start looking at its causes.  They suggest financial analysis based on strategic assets, which are (1) rare, (2) difficult to imitate and (3) generate net benefits, like growth in a customer base or sales.  There would be four steps to this type of analysis. From the paper, with our emphasis:  1. Taking inventory of strategic assets: Compiling a list of the major strategic assets of the enterprise; distinguishing between operating and dormant assets (e.g., patents under development or licensed out versus abandoned patents), active brands (enabling the charging of a premium product price) and brands in name only, or producing oil and gas properties and those under exploration versus inactive properties. Such inventory taking establishes the foundation—active strategic assets—of the company’s competitive advantage. 2. Enhancing strategic assets: Without continued investment and replenishment, even highly productive assets will wither on the vine (recall Dell). You should ask, Is the spending on R&amp;D, technology purchases, customer acquisition, brand support, and employee training sufficient to maintain and grow the business? Cutting R&amp;D or employee training to “make the numbers” clearly bodes ill for future growth. 3. Defending strategic assets: These assets are vulnerable to competition (from similar products), infringement, and technological disruption, raising the question of whether the company’s assets are adequately protected by continuous innovation, patent defensive walls, and litigation. A continuous loss of market share clearly indicates a failure to protect assets. 4. Asset deployment and value creation: Are the strategic assets, along with other company resources, optimally deployed to create value (e.g., retail outlets with increasing same-store sales)? And what is this value? Note that in our analysis, the measurement of the periodic value created is a byproduct rather than the focus of the analysis. We prefer to measure value created by cash flows to avoid the multiple managerial estimates embedded in earnings. In contrast to the cash flows generally used by analysts (EBITDA), however, we add to cash flows the company’s investments in value-creating strategic assets, such as R&amp;D, IT, and unusual brand creation expenditures, which are not really operating cash outflows. Now, if we are living in a period of secular stagnation, this could be seen as an attempt to lower the bar to make up for lackluster capital investment. (One academic literature review we found on the topic of strategic assets only cites papers from around the time of the dot-com bubble. Fancy that!)  What’s more, “defending strategic assets” can sound a lot like “maintaining monopoly power”, depending on the methods companies use in their defence. So an investment analysis focussed on strategic assets might also require more aggressive anti-trust regulation.  But if you accept the idea that widespread adoption of the internet brought a fundamental and irreversible change in the drivers of growth, there are worse approaches to financial analysis you can take.  There’s more detail and argument in the paper, which you can find here. Capital is an Asset. Decreasing value of capital is the decreasing value of an asset. When you buy the forex asset * DR Forex Asset * CR Cash When you sell * DR Cash  * CR Forex Asset The difference is now accounted for Here is how: Gains (and losses) are modifications to your financial position (Balance sheet). At the end of the period you take your financial performance (Profit and Loss) and put it into your balance sheet under equity. Meaning that afterwards your balance sheet is better or worse off (Because you made more money = more cash or lost it, whatever). You are wanting to make an income account to reflect the forex revaluation so at the end of the period it is reflected in profit then pushed into your balance sheet. Capital gains directly affect your balance sheet because they increase/decrease your cash and your asset in the journal entry itself (When you buy and sell it). If making money this way is actually how you make you make an income it is possible to make an account for it. If you do this you periodically revalue the asset and write off the changes to the revaluation account. You would do something like *DR Asset *CR Forex Revaluation account; depending on the method you take. Businesses mostly do this because if the capital gains are their line of business they will be taxed on it like it is income. For simplicity just account for it when you buy and sell the assets (Because you as an individual will only recognise a profit/loss when you enter and exit). Its easier to think about income and expenses are extensions of equity. Income increases your equity, expenses decrease it. This is how they relate to the accounting formula (Assets = Liabilities + Owners Equity) "What you are describing is a Chart of Accounts.  It's a structure used by accountants to categorise accounts into sub-categories below the standard Asset/Liability/Income/Expense structure. The actual categories used will vary widely between different people and different companies.  Every person and company is different, whilst you may be happy to have a single expense account called ""Lunch"", I may want lots of expense accounts to distinguish between all the different restaurants I eat at regularly.  Companies will often change their chart of accounts over time as they decide they want to capture more (or less) detail on where a particular type of Expense is really being spent. All of this makes any attempt to create a standard (in the strict sense) rather futile.  I have worked at a few places where discussions about how to structure the chart of accounts and what referencing scheme to use can be surprisingly heated!  You'll have to come up with your own system, but I can provide a few common recommendations: If you're looking for some simple examples to get started with, most personal finance software (e.g. GnuCash) will offer to create an example chart of accounts when you first start a session." "Asset = Equity + (Income - Expense) + Liability Everything could be cancelled out in double entry accounting.  By your logic, if the owner contributes capital as asset, Equity is ""very similar"" to Asset.  You will end up cancelling everything, i.e. 0 = 0.  You do not understate liability by cancelling them with asset.  Say you have $10000 debtors and $10000 creditors. You do not say Net Debtors = $0 on the balance sheet.  You are challenging the fundamental concepts of accounting.  Certain accounts are contra accounts. For example, Accumulated Depreciation is Contra-Asset. Retained Loss and Unrealized Revaluation Loss is Contra-Equity." "I think you've got basics, but you may have the order / emphasis a bit wrong. I've changed the order of the things you've learned in to what I think is the most important to understand: Owning a stock is like owning a tiny chunk of the business Owning stock is owning a tiny chunk of the business, it's not just ""like"" it. The ""tiny chunks"" are called shares, because that is literally what they are, a share of the business. Sometimes shares are also called stocks. The words stock and share are mostly interchangeable, but a single stock normally means your holding of many shares in a business, so if you have 100 shares in 1 company, that's a stock in that company, if you then buy 100 shares in another company, you now own 2 stocks. An investor seeks to buy stocks at a low price, and sell when the price is high. Not necessarily. An investor will buy shares in a company that they believe will make them a profit. In general, a company will make a profit and distribute some or all of it to shareholders in the form of dividends. They will also keep back a portion of the profit to invest in growing the company. If the company does grow, it will grow in value and your shares will get more valuable. Price (of a stock) is affected by supply/demand, volume, and possibly company profits The price of a share that you see on a stock ticker is the price that people on the market have exchanged the share for recently, not the price you or I can buy a share for, although usually if people on the market are buying and selling at that price, someone will buy or sell from you at a similar sort of price. In theory, the price will be the companies total value, if you were to own the whole thing (it's market capitalisation) divided by the total number of shares that exist in that company. The problem is that it's very difficult to work out the total value of a company. You can start by counting the different things that it owns (including things like intellectual property and the knowledge and experience of people who work there), subtract all the money it owes in loans etc., and then make an allowance for how much profit you expect the company to make in the future. The problem is that these numbers are all going to be estimates, and different peoples estimates will disagree. Some people don't bother to estimate at all. The market makers will just follow supply and demand. They will hold a few shares in each of many companies that they are interested in. They will advertise a lower price that they are willing to buy at and a higher price that they will sell at all the time. When they hold a lot of a share, they will price it lower so that people buy it from them. When they start to run out, they will price it higher. You will never need to spend more than the market makers price to buy a share, or get less than the market makers price when you come to sell it (unless you want to buy or sell more shares than they are willing to). This is why stock price depends on supply and demand. The other category of people who don't care about the companies they are trading are the high speed traders. They just look at information like the past price, the volume (total amount of shares being exchanged on the market) and many other statistics both from the market and elsewhere and look for patterns. You cannot compete with these people - they do things like physically locate their servers nearer to the stock exchanges buildings to get a few milliseconds time advantage over their competitors to buy shares quicker than them." One way of looking at it is that your equity in your house is an investment in a particular class of asset, and investing further in that asset class may drive you away from, rather than towards, your preferred asset mix. It's pretty common here in New Zealand for people's only investments to be their homes and rental properties. I wish those people luck when our current property boom ends. "First off, with startups, forget that you know about common structures of debt and equity. Just try to think of this money as a generic ""investment"" that meets the investors risk and return objectives.  Startups are unique in that they are high risk but generally have almost no assets or security for an investor. Investors generically want two things: 1) Return and 2) Limited Risk.   Without speculating too much: consider that the investor might be viewing the return component as the 30% equity and the 8% dividend and he views the risk management component as the additional 30% equity, until repaid.  A different way of looking at this might be that the investor would require an equity stake greater than 30% with greater than a 8% dividend if he did not get the initial investment back in return for the reduced stake.  In other words, this structure is debt and equity because that is what the investor can demand.  Maybe you can get around this by offering a higher equity stake or offering something else although this structure is common because it aligns interests of the investor and the startup." "What benefit do I get from buying a share The value of any financial asset is its ability to generate cash in the future, and thus the ""value"" of a share is heavily influenced by the dividends it pays and the equity value.  The equity value can be calculated different ways. Two common ways are to just take ""book"" value, meaning assets - liabilities, or you can look at the projected free cash flows of the company discounted back to the present time. Voting rights don't typically influence a share price except in hostile takeover scenarios (meaning someone buys up a lot of shares to have more influence in company decisions)"