Equity in relation to finance can be defined as the ‘interest ownership in a property’. In a balance sheet this usually is depicted separately along with two other entities which are known as ‘assets’ and ‘liabilities’. In most instances the equity of an organization is also known as ‘members equity’. In general terms, the value of members equity will equal the balance after subtracting the liabilities from the overall assets value.
What is members equity?
Many organizations run their day to day businesses through the funding generated from collecting money from its membership. However, the services provided by such organizations will be towards its members and it is basically a fee charged for providing such services. However, the equity member is somewhat different in that, the members’ contribution will give him some ownership of the organization and will therefore be part of its successes as well as its failure.
Another important aspect of equity memberships is their ability to give up the membership or the ownership in exchange for the membership equity value. Some examples for organizations which may look for equity memberships include private clubs, cooperatives as well as some of the condominium developers.
When does members equity becomes a deficit?
As explained earlier, the membership equity can be calculated by subtracting the liabilities from the total assets belonging to the organization. Thus, when the liabilities exceed the assets, the members’ equity becomes negative and therefore is known as ‘deficit membership equity’. In some instances, this would mean that, if all the members request their equities back, the organization is not in a position to pay them in full.
What are the implications of having a members equity deficit?
Usually, having negative members equity does not reflect a good picture regarding the organization’s financial state. However, not all such instances mean the company is at a drastic loss. Moreover, in some instances the reason for a negative ‘members equity’ could be an accounting method that brings forward the accumulated losses from previous years as liabilities to the present balance sheet. Thus, until such brought forward losses exist in paper, the members equity will be shown as a deficit, which will get corrected once these values are cancelled. Thus, in actual terms, such deficits only exist in paper but the company has the capacity to run its operations without much of a problem.
However, in some instances, this may not be the case. Some of the other reasons for a members equity deficit includes borrowings and substantial currency depreciations.
In whatever circumstances, appearance of a members equity as a deficit should be taken seriously and one should consult a financial or tax advisor in order to obtain more information on what future actions are necessary to mitigate the potential losses.