What is the difference between equity and assets?

Question

I am (going to be) using GNU Cash, which uses the double-entry method; I use it for personal finance. Reading various tutorials for GNU cash, it lists 5 types of accounts: income, expense, assets, liabilities, and equity, followed by various examples. For assets, it gives stuff likes houses and cars, but it doesn't give an examples for equity. Couldn't all those things also be put under an equity account (and, mathematically, liabilities could also be put under equity accounts too.) Here is my guess: Equity represent various "organizations." For example, if I had three ice cream divisions, chocolate, strawberry, and vanilla, they would be examples of "equities." If strawberry uses $100 of advertising using the company bank account, the company would incur $100 of advertising expenses, loss $100 of from the asset of the bank account, and the equity of strawberry would go down $100. This doesn't seem to satisfy the accounting equation though. If my above assumption is correct, a household would only have on equity account (you aren't going to tell your kids after they graduate how negative their equity has been to the family.) I suppose I am having trouble seeing the point of the equity category. How can I determine whether to categorize something as equity or income.

Answer 1

Equity is sometimes called net assets. It is the difference between assets and liabilities. The basic accounting equation is Assets = Liabilities + Equity. If our interest is in defining equity, we could rewrite the formula, solving for equity, and it would be Equity = Assets - Liabilities. In a personal finance framework, I would liken it to net worth. It's the equity, or ownership you hold in your assets, because it's the value of those things you own that exceeds the amount of debt you may have used to acquire them. Things that can increase equity in business include: income, and capital contributions. In personal finance, income would work the same way because it would increase your assets and your net worth simultaneously. Expenses and owner withdrawals will reduce equity as you indicated. Similarly, that is because the expenses require payment and reduce assets. Because we typically do not recognize or record increases in value for our long-term assets unless we are selling them, equity over time often fails to accurately estimate the true value potentially available if all liabilities were satisfied with existing assets.