The assets, liabilities and shareholder’s equity are three crucial elements that can present the financial position of a company. The accounting equation is an equation that links them together, which states that the total assets that a company owns are equal to the sum of its liabilities and equity. Thus, if we want to calculate the equity of a company, we can subtract the sum of the assets’ value from the sum of liabilities. So, is it possible for the company’s equity to be negative in value? The answer is yes. 

A negative balance in the equity means that the company’s liability has exceeded the total asset value. Various reasons can lead to this. For example, the company has made a large dividend payment to the shareholders, borrowed money rather than choosing to issue new shares to cover the losses, or has been bearing substantial losses over the years. The accumulated losses can lead to negative equity because the company will carry the losses forward and reflect them in the balance sheet under the retained earnings section. 

Knowing whether the equity of the company has a negative value is crucial, and business owners should check the figures regularly. To calculate the equity, firstly, they need to obtain the figures of total assets and total liabilities they have. If they need these numbers in the calculation, they need to make sure that they have recorded their business transactions and prepared the financial statements accurately for them to obtain the correct figures. If they are not confident that they can do these all by themselves, hiring an accounting firm in Johor Bahru will be a good choice. 

Negative equity will not only happen to business entities, but it can happen to individuals also. As an instance, if the house prices have been diminishing, the individuals who own the houses may be facing negative equity. This indicates that the value of the residential property they own was much lesser than before, and the sum of money they owe to the bank may be higher than the amount the house worth. 

For individuals or businesses that already have negative equity, they need to take some actions to prevent the situation from becoming worse. Firstly, they need to decrease the amount of money they borrow, that is, to reduce the reliance on debts. Instead of getting loans and increasing the amount of debts, they should pay more attention to other choices that can help them to solve the problem. Besides, they need to be determined to pay off the mortgage step by step rather than forcing themselves to pay off all at once. They may also seek help from the professionals to find out the ways that they can save themselves out of the situation of having negative equity. 

In a nutshell, negative equity refers to a situation where the total value of the company’s liabilities is higher than that of the sum of assets. This shows that there is a possibility for the business entity or the individual to become indebted. Thus, to prevent such a situation from happening, business owners should pay attention to the assets and liabilities of their companies when they want to get a loan and assess the company’s financial position regularly.