Equity

That Equity is the portion of the company's capital that belongs to the owners. It is made available on a permanent basis, is not subject to any repayment obligation and is the balance of Assets - Liabilities. Equity is shown on the liabilities side of the balance sheet and reflects the company's net assets.

Function and meaning:

Source of funding: Start-up capital through shareholder contributions or profit retention
Risk buffer: Absorption of losses → reduces insolvency risk
Creditworthiness: Basis for creditworthiness and capital procurement
Right to a say & claim to profits: Owners receive a share in the company's success

Legal basis & components (depending on legal form):

Sole proprietorships/partnerships:
- Equity account with sub-accounts for withdrawals, deposits, profit/loss
Corporations (e.g. GmbH, AG):
- Subscribed capital (share capital)
- Capital reserves (e.g. premium on issue of shares)
- Retained earnings (legal, statutory, free)
- Profit/loss carried forward
- Net profit or loss for the year

Key figures:

Equity ratio: (equity / total capital) × 100 - indicator for financial stability
Return on equity (ROE): (Net income / equity) × 100 - Return for owners
Leverage effect: Strengthening the return on equity by utilising debt capital

Equity in SAP Business One:

Part of the Balance sheet accountsrecognised on the liabilities side
Automatic adjustment: Profits/losses from the income statement are recognised directly in equity
Balance sheet report: Shows equity share in absolute and percentage terms
Closing logic: P&L-Balance is transferred to equity account at the end of the period

Example: A GmbH has share capital of € 25,000, a capital reserve of € 5,000 and a net profit for the year of € 10,000. The equity in the balance sheet therefore amounts to € 40,000 - provided there are no carryforwards.