If you see the Sweat equity in the details of remuneration of directors and key managerial personnel, you may not understand why is it and what is its meaning. How to calculate it and what is the worth. So, there are lots of questions may come in your mind. So, today, we solve all these Questions in our content 5 Important things to know about sweat equity.
1st Important thing to Know About Sweat Equity
What is Sweat Equity?
Sweat equity is the combination of two words. One is sweat and second is equity. Sweat comes from manual and mental labour and equity comes investment in business. If any person invests his own labour as capital in the business, it will be sweat equity. Following are its example.
1. Invest time of businessman in the business is sweat equity.
2. If a partner gives time and knowledge for business instead money, it will be sweat equity.
3. If an employee gets salary in the form of shares, it will be sweat equity.
4. If a real estate owner will increase the value of estate by his own afforts, it will be his sweat equity.
2nd Important thing to Know About Sweat Equity
What is the Formula to Calculate Sweat Equity?
Simple formula of value of Sweat Equity = Total Value of your Work Salary / Rate of per equity Share
If the value of salary is Rs. 1,00,000 and rate of per equity share is Rs. 100 and same employee get 1000 equity share as Sweat Equity
= 1,00,000/100 = 1000
3rd Important thing to Know About Sweat Equity
How to Record Sweat Equity in Company Accounts
With following journal entry, we will record sweat equity in company accounts
Salary Account Debit
Sweat Equity Capital Account Credit
Salary is expenses and it is written off by debit it and now, we did not pay but we gave shares and now our liability of of sweat equity amount as per value of share in the market. Our employee will be the owner of same equity
4th Important thing to Know About Sweat Equity
How to Calculate the Worth of Sweat Equity
If you are calculating the worth of sweat equity separate from employee's salary. You need to think extra. Salary is given on the basis of job performance per month. Sweat equity is given for extra reward to employee.
(A) See, did his stay in the company at the time of crisis of company. It is valuable and employee deserves for getting sweat equity
(B) Did employee work extra for success. It is valuable and will add in the part of sweat equity
(C) Did he achieve extra goal than given standard. Extra must be compensated by sweat equity
For example, our employee has spend extra time and made the design of product of company and same product's design value is Rs. 50,00,000. Now, same employee has deserve to get Rs. 50,00,000 as equity share because design is his creation without salary.
If you are calculating the worth of sweat equity separate from employee's salary. You need to think extra. Salary is given on the basis of job performance per month. Sweat equity is given for extra reward to employee.
(A) See, did his stay in the company at the time of crisis of company. It is valuable and employee deserves for getting sweat equity
(B) Did employee work extra for success. It is valuable and will add in the part of sweat equity
(C) Did he achieve extra goal than given standard. Extra must be compensated by sweat equity
For example, our employee has spend extra time and made the design of product of company and same product's design value is Rs. 50,00,000. Now, same employee has deserve to get Rs. 50,00,000 as equity share because design is his creation without salary.
4th Important thing to Know About Sweat Equity
How Does Company Issue Sweat Equity
Company will issue sweat equity shares by passing special resolution in general meeting. In this resolution, no. of shares, current market price and consideration will mention. This resolution must be passed by 75% of the members who attended the votes.
It must be under the rules of SEBI
Company can not issue more than 15% of paid up capital as sweat equity in a year or more than Rs. 5 Crore whichever is higher.
