A balance can be negative

Negative total assets: what's behind it

For every private investor or investor who has ever thought about investing in a company, it is important to know what is behind a negative balance sheet.

The balance can be divided into 2 areas. On the one hand, there are the assets that show the claims of the company that were acquired with the economic resources of the operation.

On the other hand, there is the liabilities. These show how the funds with which the company operates are financed. A distinction is made here between debt capital and equity.

The equity

Equity plays a particularly important role in business management, real estate financing and in the capital market. It shows the proportion of assets that are left after the company's debt is deducted.

More on this:Difference: equity and debt

In contrast to borrowed capital, equity comprises the financial resources flowing into a company. This is the portion that is paid out in the event of bankruptcy.

Equity therefore includes subscribed capital, retained earnings and capital reserves, profit and loss amounts, deficits and annual surpluses.

The negative total assets

If the debts are greater than the assets of a company, that is a negative balance sheet total. The equity ratio can be calculated from the equity. This provides information about the share of equity in the balance sheet total of a company.

This rate is used, for example, to check the creditworthiness or creditworthiness of a company. Negative capital changes the rate and can lead to a loan being rejected.

More on this: Profit and balance sheet: what they say and how they are related

However, the quota does not say anything directly about the solvency of a company. Sole proprietorships can meet their obligations even when they have negative accounts.

The negative balance sheet total can then be offset by profits from past or future financial years.

Comparison of positive and negative total assets

Both types of equity are treated in different ways in business administration.

The positive equity only appears on the liabilities side of a balance sheet, while the negative capital always appears on the assets side.

On the liabilities side, the relationship between equity and debt is shown. If no equity capital is entered on the liabilities side, the operation is considered to be endangered because it is only financed from outside capital.

If this condition persists, the company can run into problems. For a short while, however, this situation is quite normal every now and then. Even in the normal case, this does not mean that the company is insolvent.

Every fiscal year is different, and a negative balance sheet total can be quickly compensated for.

Overall, you shouldn't be put off by a negative balance sheet total. Only when such a state has persisted over a long period of time should you think twice about an investment.

How to calculate the equity ratio of a company As the half-yearly reporting season has just begun, you will get to know some important key figures over the next few days. > read more

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