Equity
Learn what equity means for your business, how to calculate it and how to build it over time.
June 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Equity is what's left of your business assets after you subtract all liabilities, and in Malay it's called ekuiti
- A private company (Sdn Bhd) reports shareholders' equity, while sole proprietorships and partnerships track the capital the owner puts in and takes out
- Positive equity matters for Sdn Bhd owners because the Companies Act 2016 only allows dividends from profits when the company is solvent
- You build equity mainly by keeping profits in the business and paying down debt
What is equity?
Equity is the value of your business that belongs to you as the owner. You work it out by subtracting everything the business owes from everything it owns.
The Association of Chartered Certified Accountants (ACCA) explains in its Conceptual Framework guide that equity is the residual interest in assets after deducting all liabilities. In Malay, the term is “ekuiti”.
If your business has assets worth RM200,000 and liabilities of RM80,000, your equity is RM120,000 (RM200,000 − RM80,000). Think of it as the amount you'd keep if you sold every asset and cleared every debt.
Types of equity
Equity takes different forms depending on your business structure and what's being valued. These are the types you're most likely to come across.
Shareholder equity
Shareholder equity is the owners' stake in a company, such as a Sdn Bhd (Sendirian Berhad, or private company). It's made up of share capital, which is the money shareholders paid for their shares, plus retained earnings.
Under section 74 of the Companies Act 2016, Malaysian company shares have no par or nominal value, as ACCA's summary of the Act explains. Your balance sheet shows the amount paid for shares as share capital, with no separate share premium line.
Owner's equity
This version applies to sole proprietorships and partnerships registered with the Companies Commission of Malaysia (SSM) under the Registration of Businesses Act 1956. It's the money you've put into the business plus profits you've kept, minus what you've taken out.
Home equity
Home equity is the part of your property you own outright: its market value minus the mortgage you still owe. Some owners borrow against it to fund a business, which puts the home on the line as security.
Brand equity
Brand equity is the value your business name and reputation add beyond your products. A trusted brand can help you charge more and win repeat customers.
Private equity
Private equity is investment in companies that aren't listed on a stock exchange, usually by specialist funds. These investors buy a stake and often help run the business to grow its value before selling.
How to calculate equity in business
You calculate equity by subtracting total liabilities from total assets. Follow these steps using your latest figures.
- List everything your business owns and add up the values to get total assets.
- List everything your business owes and add up the values to get total liabilities.
- Subtract total liabilities from total assets to get your equity.
Here's how it works for a Kuala Lumpur consultancy that's set up as a Sdn Bhd. Its assets are:
- RM30,000 cash in the bank
- RM15,000 in invoices owed by customers
- RM10,000 of equipment
- RM12,000 company vehicle
That gives total assets of RM67,000. Its liabilities are:
- RM20,000 business loan
- RM7,000 in unpaid supplier invoices
- RM3,000 credit card balance
That gives total liabilities of RM30,000. Subtract liabilities from assets (RM67,000 − RM30,000) and the consultancy's equity is RM37,000.
Is equity an asset?
No. Equity is the owners' claim on the assets, and it sits in its own section of the balance sheet, below liabilities.
The link between them is the accounting equation: assets = liabilities + equity. With double-entry bookkeeping, every transaction updates both sides, so the equation always balances. In the consultancy example, RM67,000 of assets equals RM30,000 of liabilities plus RM37,000 of equity.
Equity vs owner's equity vs net worth
All three terms describe assets minus liabilities, and the one you use depends on how your business is set up. In Malaysia, you'll usually see these labels:
- a Sdn Bhd reports shareholders' equity, made up of share capital and retained earnings
- sole proprietorships and partnerships use owner's equity, which tracks capital put in, profits kept and drawings taken out
- limited liability partnerships (LLPs) registered under the Limited Liability Partnerships Act 2012 report partners' capital, as each LLP is a separate legal entity
- net worth is the everyday term, used for a person's total wealth as well as a business
How equity moves in a Sdn Bhd
In a Sdn Bhd, equity is held as shares, so ownership changes whenever shares are issued or transferred. Here's how that usually plays out.
At incorporation, founders split the shares between them, for example 60% and 40%. If the company later issues new shares to an investor, each founder owns a smaller percentage. This is called dilution.
Say the investor's new shares make up 20% of the enlarged company. The founders' stakes become 48% and 32%, and the company gains fresh cash, which increases total equity.
A share transfer works differently. An existing shareholder sells or gifts shares to someone else. The holder changes, but the total number of shares stays the same, so nobody is diluted.
Keep an up-to-date capitalisation table (cap table) that records who owns which shares and when they got them. For changes beyond the routine, talk to your company secretary or a lawyer.
Equity financing vs debt financing
Equity financing means raising money by selling part of your business, while debt financing means borrowing money you repay with interest. Each has trade-offs.
With equity financing, you skip loan repayments and investors share the risk. In return, you give up part of your ownership, a share of future profits and some say in decisions.
With debt financing, you keep full ownership and control. You'll make regular repayments, and more borrowing raises your gearing ratio, which compares debt with equity and is something lenders check.
In Malaysia, the Securities Commission Malaysia (SC) regulates equity crowdfunding (ECF) and peer-to-peer (P2P) financing platforms. The Malaysia Co-investment Fund (MyCIF) co-invests in micro, small and medium enterprises (MSMEs) alongside private investors on these platforms.
Many Malaysian small businesses use a combination of both. For example, you might take a bank loan for equipment and bring in an investor to fund expansion.
Why equity matters
Equity shows what your business is worth to you, and lenders, investors and buyers use it to judge the business too. A healthy figure helps you:
- set a realistic price if you sell the business
- borrow on better terms, because lenders see a stronger buffer
- attract investors who want to see value building over time
- support insurance cover and business valuations with clear figures
- make growth and spending decisions with confidence
How equity changes
Your equity shifts whenever the business earns, loses, raises or pays out money. Your equity goes up when:
- the business keeps its profits as retained earnings
- you put more of your own money into the business
- investors buy new shares in your company
- assets you own are revalued at a higher amount
On the other side, your equity goes down when:
- the business makes a loss
- you take drawings from a sole proprietorship or partnership
- your company pays dividends to shareholders
- assets lose value through depreciation or write-offs
Where equity is recorded and how it's reported
Equity is recorded in the equity section of your balance sheet, which shows assets, liabilities and equity at a point in time. It also appears across your other financial statements.
Malaysian companies report under standards issued by the Malaysian Accounting Standards Board (MASB). Malaysian Financial Reporting Standards (MFRS) are mandatory for entities other than private entities. The Malaysian Private Entities Reporting Standard (MPERS) is the framework for private entities, as the MASB's preface to its standards sets out.
A full set of financial statements usually includes a statement of changes in equity, which shows how equity moved during the year through profit, dividends and new share issues. Under MPERS, which is based on the IFRS for SMEs Accounting Standard, some private entities can instead present a simpler combined statement of income and retained earnings if equity hasn't moved beyond profit, dividends and similar items.
A private company must lodge its financial statements with SSM within 30 days of circulating them to members, according to SSM's Practice Directive 8/2021. Looking ahead, MFRS 18 will replace MFRS 101 for annual periods beginning on or after 1 January 2027.
If you run a sole proprietorship, your balance sheet is simpler. You'll see owner's capital and drawings in place of share capital and dividends.
What is negative equity?
Negative equity means your liabilities are greater than your assets, so the business owes more than it owns. It can happen after a run of losses or when borrowing funds assets that lose value.
For a Sdn Bhd, negative equity limits what you can pay out. Under sections 131–132 of the Companies Act 2016, dividends may only come from profits, and only if the company is solvent. Datamet's guide to declaring dividends covers the solvency test in more detail.
Directors also carry personal risk. Under section 540 of the Act, directors who carry on business to defraud creditors can be personally liable for company debts. Law firm Skrine's overview of fraudulent trading covers both the civil and criminal liability involved.
If your equity turns negative, speak to an accountant or licensed insolvency practitioner early. The sooner you get advice, the more options you'll have to rebuild.
How to build equity in your business
You build equity by growing what the business owns and shrinking what it owes. These five steps help you do both.
- Find ways to increase your profits, such as reviewing your prices or trimming costs you can live without. Every ringgit of retained profit adds directly to your equity.
- Reinvest a share of your profits in the business so retained earnings keep growing.
- Pay down loans and other liabilities, starting with the most expensive debt.
- Keep cash coming in by sending invoices promptly. Online invoicing makes it easier for customers to pay on time.
- Check your equity every month on your balance sheet so you can spot changes early and act on them.
Track your business equity with Xero
Knowing your equity helps you borrow, invest and plan with confidence. Xero's reporting tools turn your accounting data into an up-to-date balance sheet, so you can see your equity whenever you need to.
You can also share reports with your accountant in real time and plan your next move together. Try Xero today and get one month free.
FAQs on equity
Here are quick answers to common questions about equity.
What is equity in simple terms?
Equity is the part of your business that belongs to you rather than to lenders or suppliers. As profits build up and debts shrink, that part grows.
What is equity in Malay?
Equity is “ekuiti” in Malay. You'll see the term on Malay-language balance sheets alongside aset (assets) and liabiliti (liabilities), with total equity shown as “jumlah ekuiti”.
What's the difference between equity and shares?
Shares are the units of ownership in a company, while equity is the total value that belongs to the owners. Your shareholding percentage tells you how much of that value is yours.
How often should you calculate equity?
Accounting software updates your equity as you reconcile transactions, so you can check it at any time. Review it closely before big decisions, such as applying for a loan, bringing in an investor or declaring a dividend.
What is return on equity?
Return on equity (ROE) shows how much net profit your business earns for each ringgit of equity. Calculate it as net profit ÷ equity × 100; for example, RM7,400 of net profit on RM37,000 of equity gives an ROE of 20%.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.