Owner’s equity, also know as shareholders’ equity, represents the residual interest in the assets of a company after deducting it’s liabilities. In real words, it is the portion of a company’s assets that belongs to the owners or shareholders of the business.
In the UK, owner’s equity is regulated by the Companies Act 2006, which requires all limited companies to maintain a balance sheet that shows the company’s assets, liabilities and equity at the end of each financial year. The equity section of the balance sheet typically includes several accounts that reflect the different types of contributions and earnings that affect the owner’s equity.
The most common components of owner’s equity include the following:
- Share Capital: This represents the nominal value of the shares that the company has issued to it’s shareholders. Share capital is usually divided into different classes of shares, each can have it’s own rights and restrictions.
- Retaining Earnings: This refers to the accumulated profits that the company has earned and retained over time. Retained earnings are usually reinvested into the business, but they can also be distributed to shareholders in the form of dividends.
- Revaluation Reserve: This account reflects the increase in the value of the company’s assets that have been revalued, such as property or investments. Please note revaluation reserves are not distributable as dividends but can be used to offset losses or write down the value of assets
- Other Reserves: This category includes any other equity accounts that are not covered by the above categories; such as share premium, capital redemption reserve or merger reserve.
It is worth noting that owner’s equity is a dynamic concept that changes over time as the company generates profits, issues new shares, pays dividends or revaluing assets. Changes in owner’s equity are usually reported in the statement of changes of equity, which shows the movements in each component of equity during the financial year.
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