Equity or eigen vermogen is the intrinsic value of a company: What should be payed for it, when discounting stuff like potential future earnings.
- When equity is negative, the company probably has more debts than assets: It has a negative value
- It seems that equity is not calculated directly, but always indirectly, like through the Equity equation
- Equity is a 'balance-post entity': It's based on balance-related posts. No P&L-related posts are involved.
Can't balance with or without equity?
It seems quite weird to me, but in some situations you can't balance stuff without equity, and in other situations, you can't balance stuff with it.
See file Test-bookkeeping-2023.03.03-equity-complete-bookkeeping-example-without-vat.ods, available for download below.
On January 15, the company sells something to customer Alice for € 2.500. No VAT is involved:
- € 2.500 to Debtors - A debit account
- € 2.500 to Revenue - A credit account
On January 16, Alice pays by bank transfer:
- € 2.500 off Debtors - A debit account
- € 2.500 to Current account - A debit account.
Both bookkeeping facts easily balance - No need to include equity in any shape or form.
With these being the only transactions this year and opening balance with only 0's, the closing balance becomes:
Debit Credit ----------------------------+---------------------------------- Current account: € 2.5000 | Creditors: € 0 Debtors: € 0 | Equity: € 2.500 - € 0 = € 2.500 -------- | ------- Sum € 2.500 | € 2.500
As you can see, the equity equation is included as the only credit line. And without it, the balance wouldn't balance.
Bookkeeping facts including equity
How to incorporate equity in a bookkeeping spreadsheet?
Is equity cumulative over the year? Is equity over a year the sum of its value over the 12 months of that year? How to incorporate it in a spreadsheet bookkeeping? Per month? Only per year? Per bookkeeping fact?
- To start with: As figured out in the previous chapter, you don't need equity to balance bookkeeping facts. Au contrary: You can't balance them with equity
- You can calculate equity changes for each bookkeeping fact. Those changes over a whole month, are the same as if you calculate equity change for the month as a whole - It's all linear
- Same counts for the equity change over a year: It's the same as the sum of changes per month or the sum of changes for each bookkeeping fact that year
- Maybe one way to look at equity is that it is a trick to balance the balance sheet: Without 'some' P&L accounts, a balance sheet wouldn't balance.
Summary (2023.03.03): You can include equity for each month or even for each booking fact, but don't include it in the checksums. See .../Administratie - 2023/Test-boekhouding for examples.
How I do this myself
- Have separe sheets Opening balance and closing balance
- Include equity only on these opening- & closing balance sheets. Nowhere else.