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Difference between common equity and total equity?
In this post, we will talk about ‘Difference between common equity and total equity? ‘ Previously we discussed THE TIME’S EQUITY FINANCING WOULD FAIL YOU?
Equity basically means shares or stocks. In the financial statement of companies, equity is recognized in the statement of financial position. Equity is the net amount of the total funds invested by the owners of business including retained earnings. It is calculated as the difference between the total assets and liabilities of a company. In the financial statements of companies equity consists of ordinary share capital, preference share capital, share premium, retained earnings and revaluation surplus. There is the tendency to confuse common equity with total equity and think they both mean or consist of the same thing but they are not the same. Here are the different definitions and what they’re about.
What is Common equity?
Common equity is the stock owned by the founders, employees and all other shareholders of a company. It has a residual claim on the company’s income and assets after all preferred equity holders and creditors in the case of bankruptcy or merger. It is basically a number of investments held by shareholders in a company. It includes ordinary shares, retained earnings, and any other additional paid-in capital. It excludes preferred shares or any other related interest with preferred equity statuses such as partnership interests or limited liability units. It can be represented as;
Common equity = shareholder’s equity (or total equity) – preference shares.
These shareholders have voting rights in the companies where they have investments. They are part owners of the company. They are entitled to dividends when declared, but they receive dividend only after the preferred shareholders have been settled. They enjoy higher returns when a company’s net worth increases as opposed to preference shareholders who are entitled to a fixed percentage dividend.
Also, it is a long-term source of finance that can be issued by private firms that intend to become publicly traded or by startup companies when there’s a cash shortage. It can also be included in employees’ remuneration packages thus encouraging them to work hard, to attract experienced professionals and also reduce high turnover of employees.
What is Total Equity?
Total equity represents the total shares held by founders and other part-owners of a company. It consists of common equity and preferred equity. Total equity is derived by deducting total liabilities from total assets. Information about a company’s liabilities and assets can be found in its financial statements. Total equity can be represented as:
Total equity = total assets – total liabilities;
Where: total assets consist of: non-current assets + accounts receivable + cash + marketable securities + prepaid expenses + goodwill +other assets and
Total liabilities consist of: short-term notes + accrued liabilities + long-term debt + accounts payable + unearned revenue + other liabilities
Alternatively, total equity can be derived by adding up all the line items in the statement of financial position of shareholders’ funds and deducting dividends. The line items include ordinary shares, share premium, retained earnings, reserves and preference shares.