Gross equity is that total value, without any deduction or correction, that belongs to a person or company.
In other words, it refers to the set of assets that is owned without taking into account the way in which the assets were obtained or if, on the contrary, they have linked debts.
A frequent case in which the gross equity is usually calculated is when we want to refer to the value of our home, which in most cases has a linked mortgage debt. In other words, if our house has a value of €100,000, but we still have a €25,000 mortgage to pay, the net value of our assets in this case would be €75,000, while its gross value would amount to €100,000.
What is gross equity used for?
This type of equity calculation is essential for the public sector, since, from this value, reductions, deductions or discounts of taxes and fees can be made.
In other words, if we have to declare to the Treasury that we have 2 homes for a total value of €250,000, that must be the gross value. We must not subtract debts or possible embargoes from this, since, if any deduction must be made or not, the treasury will take care of it, also declaring those debts on our part.
Thus, gross wealth is a key player in the declaration of assets in any country that has a tax system.
Gross equity vs Net worth
To satisfactorily understand the term, any type of confusion with its ‘net’ version, which is more frequent in the accounting and financial field, must be cleared up.
The way to calculate both would be as follows:
If, on the one hand, the gross equity is the set of all the assets belonging to an entity (assets), the net equity will be no more than that same list of assets subtracting, in turn, the debts that are linked (liabilities). ).
Gross Equity Example
Given a company that wants to put a truck up for sale, it is intended to find out if the operation will be profitable or not.
To do this, the company must take into account the gross and net value of the asset, the related debts, the depreciation applied, the market value and the taxes to be paid.
The data would be the following:
- Gross value: €50,000.
- Net worth: €25,000
- Loan linked to the vehicle: €5,000.
- Amortization applied: €20,000.
- Public rate of 10% for the sale.
- Market value: €35,000
Then, if the truck is put up for sale for €35,000, we will have to subtract the linked loan (€5,000) and the public sale rate (€3,500=35,000*10%). The final amount to be deposited would be €26,500 (35,000-5,000-3,500), €1,500 more than its net worth according to the company’s accounting (€25,000).
If it were the case that we only know the net value and we want to know the gross, then we add the applied amortization (€20,000) and the linked loan to the net value:
It should be noted that accounting depreciation is considered to be a reduction in assets, so it must be taken into account in the calculation.