Equity
Equity is the residual of assets minus liabilities. It includes share capital, reserves and undistributed result, among other things.
What does equity mean?
Equity is the residual of assets minus liabilities. It includes share capital, reserves and undistributed result, among other things.
Positive equity does not mean that the same amount is available in cash. Part may be tied up in machinery or statutory reserves. Whether it is available for dividend requires a separate test.
How does it work?
Equity is what remains when all provisions and debts are deducted from the assets. Article 2:373(1) DCC prescribes seven items: issued capital, share premium, revaluation reserves, other statutory reserves, reserves under the articles of association, other reserves and undistributed profits, with the result for the financial year shown separately as long as its appropriation has not been processed. Statutory reserves and reserves under the articles are restricted: they limit what a BV may distribute (art. 2:216(1) DCC).
Equity changes in two ways. Through the result: profit increases it, loss reduces it. And directly: payments by shareholders, dividend, purchase of own shares, revaluations and the effect of a change in accounting policy bypass the profit and loss account. Medium-sized and large entities show these movements per item in a movement schedule (art. 2:378(1) DCC); a small entity provides that schedule only for the revaluation reserve (art. 2:396(5) DCC).
Example
A BV starts 2025 with € 150.000 of equity: capital € 1.000, share premium € 49.000, statutory reserve for development costs € 20.000 and other reserves € 80.000. In 2025 it makes € 45.000 profit after tax, pays € 25.000 dividend and the capitalised development costs fall to € 15.000 through amortisation. At the end of 2025: capital € 1.000, share premium € 49.000, statutory reserve € 15.000, other reserves 80.000 + 5.000 − 25.000 = € 60.000 and result for the financial year € 45.000. Total: 150.000 + 45.000 − 25.000 = € 170.000. Room under the balance test: 170.000 − 15.000 = € 155.000.
In the annual accounts
Liabilities and equity side of the balance sheet, all size classes; the breakdown varies.
Difference from debt capital
Equity does not have to be repaid and receives no fixed return; in a bankruptcy the shareholders come last. Debt capital is everything to which someone else has a claim: provisions and debts. A subordinated loan from the shareholder remains debt capital, even if it is counted as part of the guarantee capital. Equity divided by balance sheet total is solvency.
Common mistakes
- Treating the balance as free cash
- Treating a restricted reserve as distributable
What to watch for
- Make the movement reconcile: opening balance plus result, plus or minus the direct movements, is the closing balance.
- After every change in capitalised development costs, participating interests or revaluations, check whether the related statutory reserve has been updated.
- A micro entity shows one amount (art. 2:395a(4) DCC); from small upward, the breakdown of article 373 appears on the balance sheet. More in Equity in the annual accounts.
Legal basis and source
art. 2:373 DCC
Frequently asked questions
Can equity be negative?
Yes, if debts and provisions exceed the assets, usually because of accumulated losses. The BV can continue to exist, but the board must then expressly assess whether the going concern assumption is tenable, and there is no room for dividend.
Is equity the same as the value of the business?
No. It is a sum of carrying amounts. Hidden reserves in buildings, self-generated goodwill and future profit are not included; a buyer therefore usually pays a different amount.
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Preparing Dutch annual accounts?
Your first set of annual accounts is free, for every size class. Create an account and prepare the annual accounts of your Dutch company under Title 9 of Book 2 of the Dutch Civil Code.
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