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Equity is the residual value in an accounting unit's balance sheet and represents the net asset value of the owners or members' interests in an accounting unit.
According to IFRS, equity is the residual value of the assets (net assets) in the reporting unit after all liabilities in the reporting unit have been subtracted from the assets.
The equity in a balance sheet is closely linked to the income statement as changes in equity are often recognized in the income statement before the profit is transferred from the income statement to equity in the balance sheet. On some occasions, the accounts are recorded directly to shareholders' equity without being recognized in the income statement.
Equity in an accounting unit may, for example, change in transactions with the owners, sales of goods and services, purchases of goods and services or changes in value of items in the balance sheet. Deposits from the owners, such as in the formation of a limited company or in the case of a new issue, increase the value of the assets without increasing the provisions or liabilities. Withdrawal from the owners, such as a dividend, reduces the value of the assets without the provisions or liabilities changing their value.
The equity of an accounting unit is specified on various items to show the efforts made by the owners or members, the accumulated result and the result for the year and more. The names of the individual items in equity depend on the form of business that the accounting unit has and the information needs of the reporting entity's stakeholders. Shareholders' equity is recorded and reported in account group 20.
Account Group 20 - Equity
Transactions that occur directly against equity are recorded when transactions have taken place and the profit for the year is normally recorded in connection with the financial statements when the income has been calculated.
Side-by-side register and reconciliation
An accounting unit may use a page-by-step register for accounting purposes in order to record transactions in equity in a more detailed manner compared to the accounting records. A reconciliation of equity can be made between a report from a page-by-side equity register and accounts for equity in the accounts as per the main book.
The monetary value of equity is calculated as assets less provisions and liabilities. The equity of an accounting unit is affected by the changes in value of assets, provisions and liabilities.
There are no valuation principles or valuation rules for equity because equity represents a residual value that depends on the assets, provisions and liabilities in the accounting unit and their valuation.
Shareholders' equity in an accounting unit increases as assets increase, when disposals decrease or when debt decreases. Shareholders' equity in an accounting unit decreases when assets decrease, when disposals increase or when debt increases.
Financial Statements and Annual Report
Share companies and economic associations, according to the Annual Accounts Act (1995: 1554), shall submit in the Directors' Report proposals for the company's or the association's profit or loss. In an economic association, if the association is a parent company, it is also necessary to provide information about amounts that, according to the annual accounts of Group companies, are to be transferred from free equity in the Group to restricted equity.
Share companies and economic associations must, according to the Annual Accounts Act (1995: 1554), disclose changes in equity compared to the previous year's balance sheet.
Example: book equity in limited liability companies (share capital)
A limited liability company has been formed and a share capital of SEK 100,000 has been deposited in the company's bank account.