Negative Equity

by Faisal
(Dhaka, Bangladesh)

Q: How can equity be negative? Shouldn't it be considered as a liability then?


A: When the equity is negative it means the liabilities are greater than the assets. Sound crazy? Check this out...

Think of it. The regular accounting equation is:
ASSETS = EQUITY + LIABILITIES

Let's take an example. Assets $200K, Equity -$30.

So if ASSETS = EQUITY + LIABILITIES, the equation in our example is:
200 = -30 + Liabilities

And liabilities = 200 + 30
= 230

So liabilities must be $230K.

Liabilities $230K but assets only $200K. How can that be and what does that mean?

It means the business has more debts owing than it has assets with which to pay them.

It also means, in a nutshell, that the business is
bankrupt .

So negative equity means a bankrupt business.

The negative equity is
not a liability for the business.

The $30K that is negative equity would be personal money or assets paid by the owner or owners to the liabilities.

So the liabilities of $230K would be paid using business assets of $200K and $30K of private assets of the owner/s.

Interesting hey?

Anyone else have a different take on this?

Click here to post comments

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