JAMB UTME - Principles of Accounts - 2024

The value of raw materials consumed is

Detalles de la respuesta

To calculate the value of raw materials consumed, we need to follow these steps:

Step 1: Determine the Opening Stock of Raw Materials. This is the stock at the beginning of the period. According to the information provided, the opening stock of raw materials is #20,000.

Step 2: Add any Purchases made during the year. In this case, raw materials purchased during the year amount to #18,000.

Step 3: Calculate the Closing Stock of Raw Materials. This is the stock at the end of the period, which is #500.

Step 4: Use the formula for the value of raw materials consumed:

Raw Materials Consumed = Opening Stock + Purchases - Closing Stock

Substitute the values:

#20,000 (Opening Stock) + #18,000 (Purchases) - #500 (Closing Stock) = #37,500

Therefore, the value of raw materials consumed is #37,500.

Which of the following bodies regulates accounting practices in Nigeria?

Detalles de la respuesta

The body that regulates accounting practices in Nigeria is ANAN, which stands for the Association of National Accountants of Nigeria.

Here is a simple explanation to help you understand:

Association of National Accountants of Nigeria (ANAN): This is a professional body responsible for regulating the practice of accountancy in Nigeria. It sets standards for accounting professionals, conducts examinations to certify accountants, and ensures that its members adhere to professional ethics and continue their professional development. This guarantees that accounting practices in the country meet both local and international standards.

Therefore, in the given options, ANAN is the correct one as it serves the primary function of regulating the accountancy profession in Nigeria.

The term "set off" in control account is also called

Detalles de la respuesta

In bookkeeping and accounting, the term "set off" in control accounts is most commonly referred to as a contra entry.

To explain this in simple terms:

• A contra entry occurs when an amount is recorded in both the debit and credit sides of the same account or two related accounts. Essentially, it's an internal transaction.
• The main purpose of a contra entry is to offset two entries against each other. This is often used to reflect that part of a transaction has cleared or been offset by another transaction.

For example, if a business has an account that records both money received and money spent, a contra entry would allow the business to show that a certain amount received has effectively been set off by a corresponding expenditure.

It’s important because it provides a method to track the exact operations within a business’s accounts, ensuring transparency and accuracy in financial statements.

Sales for the year is

Detalles de la respuesta

Sales for the year = 10,000 +60000 - 2000 = #14,000 
Note that: the question is not asking to prepare a sales ledger but rather, the figure of sales only. 

The following are causes of discrepancies between the cash book and the bank statement balances except

Detalles de la respuesta

A bank deposit typically wouldn't cause a discrepancy; rather, it would lead to an increase in both the cash book and bank statement balances. Therefore, it is not a cause of discrepancies between the two balances.

An equipment costing #9,000 has an estimated residual value of #900, and is depreciated at 10% per annum. Using the straight-line method, what is the depreciation charge for the second year?

Detalles de la respuesta

To calculate depreciation using the straight-line method, you can use the formula:
Depreciation Expense = (Cost of Asset - Residual Value) / Useful Life
Given:
Cost of the equipment = 9,000 Residual value = 900
Depreciation rate = 10%
Useful life = 10 years (since the depreciation rate is 10%)
First, calculate the annual depreciation:
Depreciation Expense = (9,000 - 900) / 10
= 8,100 / 10
= 810
Therefore, the depreciation charge for the second year would still be #810.

The following balances were extracted from the books of Adama Ltd on 31st August 2007

The gross profit is

Detalles de la respuesta

To calculate the Gross Profit, we need to determine the difference between Sales and Cost of Goods Sold (COGS).

Step 1: Determine Sales

The sales figure is already given as #200,000.

Step 2: Calculate Cost of Goods Sold (COGS)

• Starting Stock on 1st September 2006: #20,000
• Add Purchases: #140,000
• This gives the total goods available for sale: #160,000 (20,000 + 140,000)
• Deduct Closing Stock on 31st August 2007: #10,000

So, COGS = (#160,000 - #10,000) = #150,000

Step 3: Calculate Gross Profit

Gross Profit = Sales - COGS = #200,000 - #150,000 = #50,000

Therefore, the Gross Profit is #50,000.

The cost of goods sold is

Detalles de la respuesta

To calculate the Cost of Goods Sold (COGS), we need to use the formula:

COGS = Opening Stock + Purchases - Closing Stock

Let's break it down:

• Opening Stock (beginning of the year): #2,200
• Purchases (during the year): #18,000
• Closing Stock (end of the year): #1,000

By plugging these values into the formula, we get:

COGS = 2,200 + 18,000 - 1,000

After calculating, we find:

COGS = 19,200

So, the Cost of Goods Sold is #19,200.

The opening stock at the beginning of an accounting period represents

Detalles de la respuesta

In accounting, the opening stock at the beginning of an accounting period represents the value of the inventory that a company has on hand at the start of that period. This includes all the goods available for sale at the beginning. It is essentially the remaining stock from the previous accounting period.

To clarify further:

• The opening stock is not simply the cost of goods purchased, as purchases are made throughout the period and opening stock represents only the existing stock at the commencement of the period.
• It is also not just the cost of goods sold, because those are related to the inventory that has already been sold within the period.
• It is similarly not only the goods returned from the last accounting period, as opening stock includes all unsold stock, regardless of returns.

Thus, in summary, the opening stock truly encapsulates the goods available for sale at the start of the new accounting period.

The following balances were extracted from the books of Adama Ltd on 31st August 2007

Percentage of net profit to sale is 

Detalles de la respuesta

To find the percentage of net profit to sales, we need to calculate the net profit first.

Here's how you can find the net profit:

Step 1: Calculate Cost of Goods Sold (COGS)

• Opening Stock (1-09-2006): 20,000
• Purchases: 140,000
• Closing Stock (31-08-2007): 10,000

COGS = Opening Stock + Purchases - Closing Stock

COGS = 20,000 + 140,000 - 10,000 = 150,000

Step 2: Calculate Gross Profit

Gross Profit = Sales - COGS

Gross Profit = 200,000 - 150,000 = 50,000

Step 3: Calculate Net Profit

Net Profit = Gross Profit - Expenses

In this case, the only expense given is General Expenses: 10,000

Net Profit = 50,000 - 10,000 = 40,000

Step 4: Calculate the Percentage of Net Profit to Sales

Percentage of Net Profit to Sales = (Net Profit / Sales) * 100%

Percentage of Net Profit to Sales = (40,000 / 200,000) * 100% = 20%

Therefore, the percentage of net profit to sales is 20%.

The return on debenture holding is

Detalles de la respuesta

A debenture is a type of long-term debt instrument issued by a company to borrow money from investors. When you hold a debenture, you are effectively lending money to the company, and in return, you expect a regular return. The return received by debenture holders is in the form of interest.

Here's a simple explanation of why it's interest:

• Interest: Debentures are like loans to the company. Just as banks earn interest on loans they provide, debenture holders earn interest on their investment in the debentures. This interest is predetermined and is usually paid at regular intervals, such as semi-annually or annually.
• Fixed Payment: The interest on debentures is usually a fixed percentage of the principal amount, which means it doesn’t change based on the company's profits or losses.
• Priority Payment: Interest on debentures is paid before any dividends are paid to shareholders, making it a relatively secure form of investment in terms of receiving payments.

In contrast:

• Share bonus and dividend: These are returns on equity shares, not debentures. They depend on the company's profits and decisions made by the board of directors.
• Net profit: This term refers to the total profit of a company after all expenses, taxes, and interest have been deducted. It's not directly associated with debenture holders as a form of return.

Therefore, the return on debenture holding is characterized by interest payments. These payments are made regardless of whether the company makes a profit, as long as it is solvent enough to meet its interest obligations.

Ordinary shares are also known as

Detalles de la respuesta

Ordinary shares, also known as common shares or equity shares, represent ownership in a company. When individuals or investors purchase ordinary shares, they become shareholders and have ownership rights in the company.
Equity refers to the ownership interest or residual claim on the assets of a company after deducting liabilities. Ordinary shares represent the equity portion of a company's capital structure, and shareholders who hold ordinary shares have voting rights and the potential to receive dividends.

Ifedapo Local Council has the following details for 2008

The Local Council's revenue for 2008 was

Detalles de la respuesta

To determine the Local Council's revenue for 2008, we need to identify and sum up all the revenue-generating items. The revenue for the Ifedapo Local Council includes:

• Fines: #5,000
• Allocation from state government: #20,000
• Tenement rates: #10,000
• Licences: #12,000

Add these amounts together to calculate the total revenue:

Total Revenue = Fines + Allocation from state government + Tenement rates + Licences

Total Revenue = #5,000 + #20,000 + #10,000 + #12,000

Total Revenue = #47,000

Note that amounts related to Hospital beds (#8,000), Ambulance (#13,000), Salaries (#15,000), and Vehicles fueling (#7,000) are not considered part of revenue as they represent expenses or services provided by the council.

Therefore, the Local Council's revenue for 2008 was #47,000.

Which of the following is a characteristics of a limited liability company?

Detalles de la respuesta

A limited liability company (LLC) is a business structure that offers the owners (referred to as members) limite liability protection. This means that the personal assets of the owners are separate from the liabilities and debts of the company. The owners' liability is limited to their investment in the company, and their personal assets an generally protected from company obligations.
This separation of the company's liabilities from the owners' personal assets is a key characteristic of an LLC. It provides a layer of protection for the owners in case the company faces financial difficulties or legal issues.

Prime cost consist of direct material and ___ cost

Detalles de la respuesta

Prime cost refers to the direct costs associated with producing a good. These are costs that can be easily traced and directly linked to each unit of production. It consists of direct materials, direct labour and direct cost.

A method of stock valuation is

Detalles de la respuesta

The Simple Average Price (SAP) method is a stock valuation method where the average cost of all units of stock is calculated and used as the value for inventory. This method takes the total cost of goods available for sale and divides it by the total number of units to determine the average price. The average price is then multiplied by th number of units on hand to calculate the value of the inventory

Pending the location of an error, the difference in the Trial Balance is posted to a __

Detalles de la respuesta

When a difference is noticed in the Trial Balance due to errors that have not yet been located, it is temporarily posted to a suspense account.

Here's a simple explanation:

A **Trial Balance** is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. If the totals do not match, it indicates an error. Sometimes, despite efforts to find the error, the exact location or cause is not immediately identified. When this happens, the difference is placed in a suspense account to temporarily hold and find where the error might be.

The suspense account acts as a placeholder. It's important because it allows the books to be balanced and further accounting and financial reporting processes to proceed normally while the error is being investigated and rectified. Once the error is located and corrected, the suspense account is cleared.

Which of the following is a written acknowledgement of a loan to a company?

Detalles de la respuesta

The written acknowledgement of a loan to a company is known as a debenture.

Let's explain further: A debenture is a type of long-term security issued by a company. It acts as a contract that specifies the details of the loan, including the amount borrowed, the interest rate, and the repayment schedule. Unlike some other forms of debt, debentures do not have any physical assets pledged as collateral. This means they are backed solely by the creditworthiness and reputation of the issuer.

In summary, a debenture serves as a formal and written promise from the company to pay back the borrowed money with interest at a future date. It is a common tool for companies to raise capital while providing investors an opportunity to earn interest on their investment.

Ifedapo Local Council has the following details for 2008

The council's expenditure was

Detalles de la respuesta

Capital expenditure = Hospital beds (8000) + Ambulance (13000) = #21,000
Note that the question is only asking for the value of capital expenditure

The following balances were extracted from the books of Adama Ltd on 31st August 2007

The current ratio is

Detalles de la respuesta

To calculate the current ratio, we need to understand that it is a measure of a company's ability to pay its short-term obligations with its short-term assets. The formula for the current ratio is:

Current Ratio = Current Assets / Current Liabilities

Let's identify the current assets from the given balances:

• Debtors: 50,000
• Bank: 10,000
• Stock (31-08-2007): 10,000

Adding these up:

Total Current Assets = 50,000 + 10,000 + 10,000 = 70,000

Next, we identify the current liabilities:

• Creditors: 35,000

Therefore, Total Current Liabilities are: 35,000

Now, let's calculate the current ratio:

Current Ratio = Total Current Assets / Total Current Liabilities

Current Ratio = 70,000 / 35,000 = 2:1

Therefore, the current ratio is 2:1, which means that for every unit of currency in current liabilities, Adama Ltd has 2 units in current assets to pay those liabilities. This is a healthy liquidity position as a current ratio greater than 1 indicates that the company has more current assets than current liabilities.

The total expenses is

Detalles de la respuesta

Total Operating Expenses = #1,500 (Salaries) + #1,100 (Office Expenses) + #1,300 (Other Expenses) Total Operating Expenses = #3,900

When manufactured goods are transferred to the trading account at the market price, the difference is credited to the

Detalles de la respuesta

When manufactured goods are transferred to the trading account at the market price, the difference between the cost of production and the market price is known as the profit or loss on manufacturing.
To account for this difference, it is credited to the profit and loss account. If the market price is higher than the cost of production, it results in a profit, which is credited to the profit and loss account. Conversely, if the marke price is lower than the cost of production, it results in a loss, which is also credited to the profit and loss
account.

The following accounts have debit balances except

Detalles de la respuesta

In accounting, a debit balance typically refers to an increase in asset or expense accounts. Here’s a breakdown of each account to determine which one does not usually have a debit balance:

• Share Premium: This is part of the equity on the balance sheet. It occurs when shares are issued at a price higher than their nominal value. Since it is an equity account, it typically has a credit balance, which means it is not a debit balance account.
• Rents and Rates: These are usually categorized under expense accounts, which typically have a debit balance, because expenses increase with debits.
• Return Inwards: Also known as Sales Returns, refers to goods returned by customers. It is considered a contra-revenue account, which typically has a debit balance because it is subtracted from sales (a major revenue account with a credit balance).
• Advertising: This is also an expense account, as expenditures made for advertising purposes are considered costs of doing business. Thus, they usually have a debit balance.

Based on the above explanations, the account that does not have a debit balance is typically the Share Premium account.

The following balances was exgtracted from the books of Oluwalambe Ltd, manufacturer, on 31st December 2007

Factory overhead cost is

Detalles de la respuesta

To calculate the Factory Overhead Cost, we need to consider the expenses that are not directly tied to the production process but are essential for running the factory smoothly. These include indirect costs like lighting, heating, depreciation of machinery, and indirect labor. From the data given, we will identify the elements that contribute to the Factory Overhead Cost:

• Indirect Wages: #28,000
• Depreciation on Plants: #32,000
• Factory Rent: #3,500

Other elements in the data such as stock of raw materials, purchase of raw materials, direct wages, and work in progress are part of the cost of production but do not contribute to the Factory Overhead Cost.

Therefore, the total Factory Overhead Cost is calculated by summing up all the overhead costs:

Factory Overhead Cost = Indirect Wages + Depreciation on Plants + Factory Rent

= #28,000 + #32,000 + #3,500

= #63,500

Thus, the Factory Overhead Cost is #63,500.

The raw materials available for production is ___

Detalles de la respuesta

Raw materials available: Opening Stock + Raw materials purchased Raw materials available: #20,000+ #18,000
Raw materials available: #38,000

A method that is beneficial for tax purposes in inflationary times is? 

Detalles de la respuesta

This method assumes the last items purchased are the first ones sold. It can result in a higher COGS during periods of inflation, potentially leading to lower reported profits. LIFO can be beneficial for tax purposes in inflationary times.

Issue of prospectus is an invitation to the Public to

Detalles de la respuesta

A prospectus is a formal legal document that provides detailed information about a company's financial condition, its plans for the future, and the risks involved in investing.
The primary purpose of issuing a prospectus is to attract potential investors to buy (subscribe for) shares of the company's stock.

The following extracts are made from the books of Agama Enterprises.

Method of depreciation used is Diminishing Balance The depreciation charge for year two is

Detalles de la respuesta

First, we calculate the depreciation for the first year: Depreciation for year one = Cost x Rate of Depreciation = 120,000 x 40%
= 48,000
Next, we calculate the remaining book value after the first year: Book value after year one = Cost - Depreciation for year one
= 120,000 - 48,000
= 72,000
To calculate the depreciation charge for year two, we apply the rate of depreciation to the remaining book value Depreciation for year two = Remaining book value x Rate of Depreciation
= 72,000 x 40%
= 28,800

The amount by which assets exceeds liabilities is

Detalles de la respuesta

The amount by which assets exceed liabilities is known as capital. This is a crucial concept in finance and accounting. Here's a simple explanation:

Assets are things of value that an individual or a company owns. They can include items like cash, property, equipment, and investments. They represent what the entity owns or is owed.

Liabilities are the obligations or debts that an individual or a company owes to others. They can include loans, mortgages, and other forms of debts or financial responsibilities. They represent what the entity owes to others.

The capital, also known as equity, is the net value that remains after all liabilities have been subtracted from all assets. In a simplified equation, it can be expressed as:

Capital = Assets - Liabilities

Therefore, if a company has more assets than liabilities, the excess amount is positive, indicating a strong capital position. This is an important measure of financial health, showing the remaining value available to the owners or shareholders after all debts have been paid.

Shares issued free of charge to existing shareholders based on their previous holdings is __ issue

Detalles de la respuesta

The shares given free of charge to existing shareholders based on their previous holdings are referred to as a bonus issue.

A bonus issue, also known as a scrip issue or capitalization issue, is when a company decides to reward its existing shareholders by issuing them additional shares. This is done in proportion to their current shareholding without any additional cost. For example, a company might issue one bonus share for every ten shares held.

The main reasons for a bonus issue include:

• Rewarding Shareholders: It is a way to reward shareholders for their loyalty without paying out cash dividends.
• Increasing Liquidity: With more shares available, trading in the shares becomes more liquid.
• Signalling Confidence: It often signals that the company is confident about its future profits.
• Adjusting Share Prices: The increase in the number of shares can help lower the individual share price, making them more affordable and attractive to investors.

It is important to note that while a bonus issue increases the number of shares outstanding, it does not change the overall market capitalization of the company, as the value of each share is adjusted accordingly.

When shares are over-subscribed, directors may decide to scale down the number of shareholding by alloting shares at ___

Detalles de la respuesta

When shares are over-subscribed, directors may decide to scale down the number of shareholding by allotting shares at pro rata. This means that the available shares are distributed among the applicants in proportion to the number of shares they have applied for.

For example, if a company issues 1,000 shares and the demand is for 1,500 shares, each applicant will receive a percentage of the shares they applied for based on the total available. This method ensures fairness as it maintains the same ratio of allocation relative to each investor's demand.

Allotting at pro rata ensures that all investors get an opportunity to receive a share, albeit a reduced amount than initially requested, in proportion to their original application. This approach helps to manage the allocation efficiently and maintains balance among potential shareholders.

Which of the following is a subsidiary book as well as a ledger?

Detalles de la respuesta

A cash book serves as both a subsidiary book and a ledger. It is a subsidiary book because it records all cash and bank transactions of a business in a chronological order. It includes details of cash receipts and cash payments, as well as bank deposits and withdrawals. The cash book acts as a primary record for cash and bank transaction before they are posted to the general ledger.

A partner whose liability does not extend beyond the amount of capital contributed by him is known as

Detalles de la respuesta

A partner whose liability does not extend beyond the amount of capital they contributed is known as a limited partner.

In a partnership, there are different types of partners, and each has different roles and responsibilities. A limited partner is an investor within the partnership who contributes capital but does not participate in the day-to-day management or decision-making of the business. The key feature of a limited partner is that their financial liability is restricted to the amount they have invested in the partnership. This means that if the business faces financial losses or legal liabilities, the limited partner risks only losing their investment amount. They are not required to contribute more money beyond what they initially invested.

On the other hand, a general partner, who typically manages the business, has unlimited liability and is personally responsible for all the debts and obligations of the partnership. In contrast, the limited partner enjoys protection against such personal liabilities.

This arrangement is beneficial for individuals who want to invest in a business without the risk of losing more than their original investment, while also not being involved in its operations.

Purchase Ledger Control Account

The amount #30,000 represents

Detalles de la respuesta

The amount of #30,000 represents credit purchases. In accounting, the Purchase Ledger Control Account is used to track what a business owes to its suppliers. This account is part of the liabilities section of the balance sheet since it reflects amounts that need to be paid for goods or services received on credit.

Here's a breakdown of why the amount represents credit purchases:

• The terminology “Purchase Journal” is used in accounting to record transactions related to credit purchases of goods.
• When items are purchased on credit, they are logged as debits to the Purchase Ledger Control Account. Hence, this value indicates the total goods acquired on credit from the suppliers during a specific period.
• This allows a business to track how much is owed to suppliers, as opposed to goods purchased and paid for immediately with cash, which would be logged differently.

This is significant because businesses often purchase items on credit to improve cash flow and benefit from any creditor terms like discounts for early payment. Hence, the #30,000 recorded in the Purchase Ledger Control Account is indicative of the total amount of purchases made on credit during the period.

Purchase Ledger Control Account

The item sales ledger #1,200 represents

Detalles de la respuesta

In the context of the Purchase Ledger Control Account, the item labeled as "sales ledger" amounting to #1,200 represents a situation where there is an interaction between the purchase ledger and the sales ledger.

Typically, this means that there has been a sales return or an offset transaction where the company might have paid a supplier for goods or services provided, but due to some reason like a return or an agreement, there is a balance due back to the company. This situation typically arises when there are inter-company transactions where the company is both a customer and a supplier to the same business entity.

In simpler terms, the #1,200 in the "sales ledger" represents an amount due from suppliers. This implies that a balance owed by the supplier is accounted for in the purchase ledger, indicating a receivable situation within the purchase ledger context.

Thus, it reflects an amount that is due back to the entity from their suppliers who are also their customers in some capacity.

When discount is allowed, the accounting entry is debit discount allowed account and credit ____ account

Detalles de la respuesta

The correct accounting entry to credit when a discount is allowed is the debtor account.

Here's a simple explanation:

The "Discount Allowed" is a type of expense for a business which provides an incentive to customers to make payments promptly. Therefore, you need to record this as a reduction in the total receivables.

• Discount Allowed is recorded in the books of accounts as an expense, so you debit the "Discount Allowed" account.
• You credit the debtor account (the account of the customer), because by allowing a discount, the customer now owes you less money than originally recorded. This means the amount you have as receivables from the customer (debtor) decreases.

In summary, when a discount is allowed, the accounting entry is to debit the "Discount Allowed" account to reflect it as an expense, and credit the debtor account to reduce the outstanding amount owed by the customer.

Ifedapo Local Council has the following details for 2008

The council's expenditure for the year was

Detalles de la respuesta

Expenditure:
#15,000 (Salaries) + #7,000 (Vehicles fueling)
= #22,000
Note that the question is only asking for expenditure and not capital or recurrent expenditure

A person who prepares, analyses and interprets financial statements is known as a/an

Detalles de la respuesta

A person who prepares, analyses, and interprets financial statements is known as an accountant. An accountant is a professional who is highly trained in the field of accounting, which involves managing financial records, summarizing financial positions, and ensuring compliance with financial regulations.

Here is why the role of an accountant is important:

• Preparation of Financial Statements: Accountants prepare financial statements like balance sheets, income statements, and cash flow statements, providing a comprehensive view of an organization's financial health.
• Analysis: They analyze these statements to understand and interpret the financial performance of the business. This helps in identifying trends, forecasting future financial conditions, and making informed business decisions.
• Interpretation: Accountants use their expertise to interpret financial data, explaining the significance of the figures to stakeholders, including management, investors, and regulatory bodies.

The role of a cashier is primarily to handle cash transactions. A bookkeeper assists in recording day-to-day financial transactions, and an analyst often focuses on analyzing various data sets and trends rather than specifically preparing financial statements. However, it is the accountant who brings together preparation, analysis, and interpretation of comprehensive financial data.

Which of the following bodies regulates accounting practices in Nigeria?

Detalles de la respuesta

In Nigeria, the body that regulates accounting practices is the Association of National Accountants of Nigeria (ANAN). ANAN is a professional body chartered by Act 76 of 1993 and is responsible for setting standards, guiding, and supervising the practice of accountancy in the country.

Here's why ANAN is important for accounting practices:

• Standard Setting: ANAN is involved in creating accounting standards that practitioners should follow, ensuring that financial reporting is consistent and reliable.
• Professional Guidance: ANAN provides guidelines and resources for accountants to maintain proper ethical standards and professionalism in their work.
• Supervision and Certification: ANAN certifies accountants, which involves ensuring that individuals meet the necessary educational and professional criteria to practice accounting.

By regulating accounting practices, ANAN helps maintain the integrity and accuracy of financial information, which is crucial for businesses, government agencies, and stakeholders.

Ordinary shares are also known as

Detalles de la respuesta

Ordinary shares, also known as common shares or equity shares, represent ownership in a company. When individuals or investors purchase ordinary shares, they become shareholders and have ownership rights in the company.
Equity refers to the ownership interest or residual claim on the assets of a company after deducting liabilities. Ordinary shares represent the equity portion of a company's capital structure, and shareholders who hold ordinary shares have voting rights and the potential to receive dividends.