Owner’s Equity (2024)

The proportion of the total value of a company’s assets that can be claimed by the owners and shareholders

Written byCFI Team

What is Owner’s Equity?

Owner’s Equity is defined as the proportion of the total value of a company’s assets that can be claimed by its owners (sole proprietorship or partnership) and by its shareholders (if it is a corporation). It is calculated by deducting all liabilities from the total value of an asset (Equity = Assets – Liabilities).

The liabilities represent the amount owed by the owner to lenders, creditors, investors, and other individuals or institutions who contributed to the purchase of the asset. The only difference between owner’s equity and shareholder’s equity is whether the business is tightly held (Owner’s) or widely held (Shareholder’s).

Owner’s Equity (1)

In simple terms, owner’s equity is defined as the amount of money invested by the owner in the business minus any money takenout by the owner of the business. For example: If a real estate project is valued at $500,000 and the loan amount due is $400,000, the amount of owner’s equity, in this case, is $100,000.

How to Calculate Owner’s Equity

Owner’s equity can be calculated by summing all the business assets (property, plant and equipment, inventory, retained earnings, and capital goods) and deducting all the liabilities (debts, wages, and salaries, loans, creditors).

Example: Computer Assembly Warehouse

Let’s assume that Jake owns and runs a computer assembly plant in Hawaii and he wants to know his equity in the business. Jake’s balance sheet for the previous year shows that the warehouse premises are valued at $1 million, the factory equipment is valued at $1 million, inventory is valued at $800,000 and that debtors owe the business $400,000. The balance sheet also indicates that Jake owes the bank $500,000, creditors $800,000 and the wages and salaries stand at $800,000.

Therefore, owner’s equity can be calculated as follows:

Owner’s equity = Assets – Liabilities


Assets = $1,000,000 + $1,000,000 + $800,000 + $400,000 = $3.2 million

Liabilities = $500,000 + $800,000 + $800,000 = $2.1 million

Jake’s Equity = $3.2 million – $2.1 million = $1.1 million

Therefore, the value of Jake’s worth in the company is $1.1 million.

How Owner’s Equity Gets Into and Out of a Business

The value of the owner’s equity is increased when the owner or owners (in the case of a partnership) increase the amount of their capital contribution. Also, higher profits through increased sales or decreased expenses increase the amount of owner’s equity.

The owner can lower the amount of equity by making withdrawals. The withdrawals are considered capital gains, and the owner must pay capital gains tax depending on the amount withdrawn. Another way of lowering owner’s equity is by taking a loan to purchase an asset for the business, which is recorded as a liability on the balance sheet.

The value of owner’s equity may be positive or negative. A negative owner’s equity occurs when the value of liabilities exceeds the value of assets. Some of the reasons that may cause the amount of equity to change include a shift in the value of assets vis-a-vis the value of liabilities, share repurchase, and asset depreciation.

How Owner’s Equity is Shown on a Balance Sheet

The owner’s equity is recorded on the balance sheet at the end of the accounting period of the business. It is obtained by deducting the total liabilities from the total assets.

The assets are shown on the left side, while the liabilities and owner’s equity are shown on the right side of the balance sheet. The owner’s equity is always indicated as a net amount because the owner(s) has contributed capital to the business, but at the same time, has made some withdrawals.

For a sole proprietorship or partnership, the value of equity is indicated as the owner’s or the partners’ capital account on the balance sheet. The balance sheet also indicates the amount of money taken out as withdrawals by the owner or partners during that accounting period.

Apart from the balance sheet, businesses also maintain a capital account that shows the net amount of equity from the owner/partner’s investments.

Shareholder’s equity refers to the amount of equity that is held by the shareholders of a company, and it is sometimes referred to as the book value of a company. It is calculated by deducting the total liabilities of a company from the value of the total assets.

Shareholder’s equity is one of the financial metrics that analysts use to measure the financial health of a company and determine a firm’s valuation.

Shareholder’s Equity = Owner’s Equity (they’re the same thing).

The following are the main components of Owner’s equity:

1. Retained earnings

The amount of money transferred to the balance sheet as retained earnings rather than paying it out as dividends is included in the value of the shareholder’s equity. The retained earnings, net of income from operations and other activities, represent the returns on the shareholder’s equity that are reinvested back into the company instead of distributing it as dividends.

The amount of the retained earnings grows over time as the company reinvests a portion of its income, and it may form the largest component of shareholder’s equity for companies that have existed for a long time.

2. Outstanding shares

Outstanding shares refers to the amount of stock that had been sold to investors but have not been repurchased by the company. The number of outstanding shares is taken into account when assessing the value of shareholder’s equity.

3. Treasury stock

Treasury stock refers to the number of stocks that have been repurchased from the shareholders and investors by the company. The amount of treasury stock is deducted from the company’s total equity to get the number of shares that are available to investors.

4. Additional paid-in capital

The additional paid-in capital refers to the amount of money that shareholders have paid to acquire stock above the stated par value of the stock. It is calculated by getting the difference between the par value of common stock and the par value of preferred stock, the selling price, and the number of newly sold shares.

Related Readings

Thank you for reading CFI’s guide to Owner’s Equity. To keep learning and advancing your career, the following resources will be helpful:

Owner’s Equity (2024)


Owner’s Equity? ›

Owner's equity is the portion of a company's assets that an owner can claim; it's what's left after subtracting a company's liabilities from its assets. Owner's equity is listed on a company's balance sheet.

What is an example of equity? ›

Equity is providing a taller ladder on one side or propping the tree up so it's at an angle where access is equal for both people. A line of people of different heights are watching an event from behind a fence. Equality is giving equal opportunity for each person to get a box to stand on to get a better view.

What is the formula for equity? ›

Equity is the residual value of a company after all its assets are liquidated and all liabilities to its creditors paid. The formula for equity is: Total Equity = Total Assets - Total Liabilities.

Is owner's equity the same as income? ›

Net income is calculated by taking a company's revenues for a given period of time and subtracting the cost of goods sold. The cost of goods sold includes all the expenses involved in doing business, such as rent, payroll, equipment, advertising, and taxes. Owner's equity is the business's assets minus its liabilities.

Is owner's equity equal to capital? ›

Equity represents the total amount of money a business owner or shareholder would receive if they liquidated all their assets and paid off the company's debt. Capital refers only to a company's financial assets that are available to spend.

What is an example of owner's equity? ›

Owner's Equity Explained

For example, if a business buys a piece of equipment valued at $20,000, but purchases it with a $15,000 loan, the owner's equity in the equipment is the difference between the asset and the liability — in this case, $5,000.

What falls under equity? ›

Equity represents the shareholders' stake in the company, identified on a company's balance sheet. The calculation of equity is a company's total assets minus its total liabilities, and it's used in several key financial ratios such as ROE.

How do I calculate my equity? ›

Take your home's value, and then subtract all amounts that are owed on that property. The difference is the amount of equity you have. For example, if you have a property worth $400,000, and the total mortgage balances owed on the property are $200,000, then you have a total of $200,000 in equity.

How do you calculate owners equity? ›

The formula for owner's equity is: Owner's Equity = Assets - Liabilities. Assets, liabilities, and subsequently the owner's equity can be derived from a balance sheet, which shows these items at a specific point in time.

What is a good equity ratio? ›

Still, as a general rule of thumb, most companies aim for an equity ratio of around 50%. Companies with ratios ranging around 50% to 80% tend to be considered “conservative”, while those with ratios between 20% and 40% are considered “leveraged”.

How to own equity? ›

A common way to own equity in a company is to invest in a publicly traded company listed on a stock exchange. For public companies, information about the company is transparent.

How to calculate total equity? ›

You can calculate your company's equity using the accounting equation: Equity = Total Assets − Total Liabilities. You can pull the assets and liabilities from the balance sheet. From there, you can calculate the equity value by deducting the total liabilities from the total assets.

How to increase owner's equity? ›

The value of the owner's equity increases when the business generates more profits from increased sales or decreased expenses, or the owner or owners (in a joint partnership) contribute more capital.

What is another name for owner's equity? ›

Owner's equity (also referred to as net worth, equity, or net assets) is the amount of ownership you have in your business after subtracting your liabilities from your assets. This shows you how much capital your business has available for activities like investing.

Can owner's equity be negative? ›

The value of owner's equity may be positive or negative. A negative owner's equity occurs when the value of liabilities exceeds the value of assets.

How does equity work? ›

Equity is the difference between what you owe on your mortgage and what your home is currently worth. If you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home.

What is an example of equity in your life? ›

Another example is when a person with a disability is included in a workgroup with all the necessary accommodations to perform tasks just like other team members. These are just a few ways equity manifests in society, but there are many ways to promote it every day.

What is common equity example? ›

You can come down to Common Equity by multiplying outstanding common stock by the face value of the stock to get the desired figure. If a company has 10,000 shares with a face value of $5/per share, its common equity will be $50,000.

What is equity in simple words? ›

The term “equity” refers to fairness and justice and is distinguished from equality: Whereas equality means providing the same to all, equity means recognizing that we do not all start from the same place and must acknowledge and make adjustments to imbalances.

What are work examples of equity? ›

Equity – resources and spaces are adapted to meet the needs of all employees. For example, desks are made accessible for wheelchair users, while ergonomic chairs are made available to those with musculoskeletal issues.


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