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
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.
Anyone else have a different take on this?
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