Negative Equity can be defined as a situation in the business where the liabilities of a business increase its assets.
Calculation of Negative Equity
Negative Equity can be calculated by subtracting the worth of total assets of the company from its total liabilities. For example let’s assume the case of a company ABC with having assets of total worth of $20 millions where as the total liabilities of the company are almost $40 million. Now the company has assets less than the total worth of its liabilities and this means that the company is experiencing negative equity that can be calculated as under:-
Negative Equity = Total Liabilities – Total Assets
Negative Equity =40 – 20
So, the negative equity in this case is $20 million
When Negative Equity Occurs
Negative equity occurs when the asset falls of its value or when there is too much debt taken by the company. Another situation where the negative equity may happen is the condition where the company is suffering from the years of losses or negativity. This happens due to the fact that the losses are carried to the retained earnings portion of the balance sheet.
In addition to banks the individuals also suffer from the situation of the negative equity. For example let’s take the case of an individual who is livening in a house that he has purchased after getting loan from the bank. Now in such a situation when the value of the house falls down and it become less than the loan taken by the individual from the bank the individual is said to be facing the condition of negative equity. This is because the individual owe more to the bank than in actual the house worth or he is suffering from a debt that is of more value from his assets.
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