Equity represents the owner's residual interest in the business after all liabilities are deducted from assets. It includes contributed capital, retained earnings and reserves.
Equity (also called owner's equity, shareholders' equity or net assets) is the third component of the balance sheet equation: Assets minus Liabilities equals Equity. It represents the owners' claim on the business's assets after all debts are paid. Equity consists of several components: contributed capital (money invested by owners), retained earnings (accumulated profits that have not been distributed as dividends), reserves (amounts set aside for specific purposes) and sometimes revaluation surpluses. For sole traders and partnerships, equity is often called the owner's capital account. For companies, it appears as share capital and retained earnings. Equity increases when the business earns profits (which flow into retained earnings) and when owners invest additional capital. It decreases when losses are incurred or profits are distributed as dividends or drawings. A negative equity position means liabilities exceed assets - a warning sign for financial health. SortBooks tracks equity movements accurately by ensuring all profit and loss transactions are correctly categorised and that owner transactions (drawings, capital contributions) are properly recorded.
SortBooks helps with the bookkeeping behind equity by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing equity by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
The balance sheet is a financial statement that shows your business's assets, liabilities and equity at a specific point in time. It follows the equation: Assets = Liabilities + Equity.
An asset is anything of value that your business owns or controls. Assets are listed on the balance sheet and include cash, receivables, inventory, equipment, property and intangible items.
A liability is a financial obligation your business owes to another party. Liabilities are listed on the balance sheet and include loans, accounts payable, tax payable and accrued expenses.
Retained earnings are the accumulated net profits that have been kept in the business rather than distributed to owners as dividends or drawings.
A dividend is a distribution of profits from a company to its shareholders. It reduces the company's retained earnings and represents a return on the shareholders' investment.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.