If you were a shareholder in a company, perhaps the first thing you would be interested in on a balance sheet would be the equity. Often near the totals at the end of the balance sheet, this is essentially what the company is 'worth' to its owners. For the purposes of the explanations here, the examples are for small businesses - i.e. ones that are not floating on the stock market or 'going public'. Reading the balance sheets of these enterprises can be much more complicated!

If you took everything the company owns (assets such as cash in the bank or at hand, stock, and so on) and took away due payments (liabilities such as loans, invoices due, payroll) then the final figure is the equity, commonly divided among the shareholders according to the percentage that they each own in the business. You will have seen the equity negotiations bandied around when an angel investor, for example, provides a sum of equity to the company in return for a percentage ownership.

In the world of small businesses, we only need concern ourselves with the most commonly found types of equity which are owner's equity, and that of the shareholders. This is not to be confused with publicly sold shares on the stock market by a PLC (or Public Limited Company) as the equity calculations are different in those cases.

Let's say, for example, that you have a start-up company selling computer mice, and you go 'into business' with a friend, if they provide half the money. You want to retain control of your business, yet they also want to run it as close as 50/50 that they can get, so you have 51% of the company and they have 49. Because the company is a private limited company, you each have a share in the company. Once it makes a profit, and you can see on the balance sheet that its assets and owner equity are higher than the liabilities, then you have a positive interest in the company, meaning your share has value that is positive. However, don't forget that companies don't always do that well and make profit, and the equity can be a negative number (this is common in start-ups for the first few years). When the equity is negative, the shareholders' due is also a negative number.

On a balance sheet, the two left/right (double accounting) numbers should be the same, so that the owners can see if anything else is going to affect the equity in the future. Commonly, this could be an owner's loan (or 'directors loan') and any payments relating to it. Also, it's not always good if the company has a lot of assets but low or negative equity due to high liabilities and debt, as this indicates poor financial health - the assets would have to be sold or liquidated to pay for the liabilities, again leaving the equity as negative.

Usually, if a company has been trading a while, it should have a recognisably healthy balance sheet and positive equity. If it's a new company, there is no need to be horrified by negative equity as some companies need to get their feet under the table after start up costs and so on. You can make the call on how the equity should look to each individual company, and now that you understand the process, can make your own, better informed assessments.