What is owner's equity and how to calculate it?

Starting a small business is a rewarding achievement, but it’s no easy feat. Since you own most everything that’s connected to your business, your responsibilities and tasks can feel endless. Being a business owner is unique—you own everything in your business except for your liabilities. This is where owner’s equity comes in: It’s one of the most important lines in your financial statements and represents your net worth.

Learn what owner’s equity is, how it affects you and your business, how to calculate it, as well as helpful examples. 

• Owner’s equity definition 
• Owner’s equity and business organization
• Components of equity

• How to calculate owner’s equity 
• Statement of owner’s equity 
• Examples of owner’s equity

What is owner’s equity?

Owner’s equity is the right owners have to all of the assets that pertain to their business. This equity is calculated by subtracting any liabilities a business has from its assets, representing all of the money that would be returned to shareholders if the business’s assets were liquidated. 

Finding out your owner’s equity can be helpful in determining your financial position—you’ll be able to compare the owner's equity from one period to another to figure out whether you are losing or gaining value. Owner’s equity is typically recorded at the end of the business’s accounting period. 

Owner’s equity:

• Increases when the owner (or owners) of a business increases the amount of their capital contribution. High profits from increased sales can also increase the amount of owner’s equity.
• Decreases when liabilities are larger than the assets. If this is the case, you may have to invest more money to cover the shortage.

Owner’s equity on a balance sheet

Owner’s equity is part of the financial reporting process. The amounts for liabilities and assets can be found within your equity accounts on a balance sheet—liabilities and owner’s equity are usually found on the right side, and assets are found on the left side. 

• Liabilities: Includes debts or other obligations in which your business owes money, whether it be now or in the future 
• Assets: The value of the items your business owns, like real estate and equipment

Note: If your business is acquired, the sales that the business made minus any liabilities that are owed are not transferred to the new owner during the acquisition.

What’s included in owner’s equity?

Several items are included in owner’s equity within the balance sheet, such as: 

• (+) The money invested into your business 
• (+) Profits your business has generated since it was founded 
• (-) Minus any money you’ve taken out of your business 
• (-) Minus any money you owe to others

This applies to businesses structured as sole proprietorships. However, if you’ve structured your business as a corporation, accounts like retained earnings, treasury stock, and additional paid-in capital could also be included in your balance sheet. 

Additional forms of equity

Equity doesn’t just apply to companies—it can also refer to any type of ownership of something after taking out debts. Below are some common variations of equity to be aware of: 

• Stock: Any security that represents an ownership interest in a company
• Shareholder’s equity: Retained earnings or losses plus any funds contributed to the business by shareholders or the owner 
• Real property value: In real estate, this value represents the difference between a property’s fair market value and the amount someone still owes on the mortgage 
• Risk capital: The amount of money that remains after a business repays its creditors after going bankrupt or liquidating its assets 

How business type impacts owner’s equity

Owner’s equity is typically seen with sole proprietorships, but can also be known as stockholder’s equity or shareholder’s equity if your business structure is a corporation. 

Depending on how a company is owned or operated, owner’s equity could be attributed to one owner or multiple owners. 

Sole proprietorship

This is a private form of ownership—the sole proprietor, or owner, has possession of all the company’s equity.

Partnership

This refers to a business that has more than one owner. In this case, owner’s equity would apply to all the owners of that business. Net earnings are split among the partners according to the percentage of the business they own. 

Corporation

Corporations are formed when a business has multiple equity ownership, but unlike partnerships, corporation owners are provided legal liability protection. These owners are known as stockholders. 

In order to calculate your company’s worth, you must subtract your liabilities from your assets. Owner’s equity is an important accounting equation to gauge your overall finances and what percentage of the business belongs to you. Below is the accounting formula used to find owner’s equity:

Equity = Assets - Liabilities 

Your company’s assets minus any liabilities are equivalent to the total equity of your company, also known as net worth. Follow these simple steps to help you calculate your owner’s equity:

1. Find the total assets for the period on the balance sheet.
2. Find the total liabilities for the period, which is also listed on the balance sheet.
3. Subtract the total liabilities from total assets to arrive at shareholder equity.

Examples of owner’s equity

If your business has assets that are worth $60,000 and liabilities that are worth $20,000, your equity would be $40,000 after using the owner’s equity formula:

• Equity ($40,000) = Assets ($60,000) - liabilities ($20,000) 

Another example is a business that owns land worth $40,000, equipment worth $15,000, and cash totaling $10,000. Total assets are $65,000. If the business owes $10,000 to the bank and also has $5,000 in credit card debt, its total liabilities would be $15,000. 

To find the owner’s equity, you’d take $65,000 and subtract $15,000, which equals $50,000. 

Statement of owner’s equity

Within your financial statements, you may come across a statement of owner’s equity. This statement provides details about changes to your capital account over a period of time, such as: 

• The opening balance of your capital account 
• Any increases to equity from capital contributions or profits 
• Decreases to equity from capital distributions or losses
• The closing balance of your capital account 

Note: The closing balance on this statement should match the equity accounts that are shown on your company’s balance sheet for that accounting period. 

Owner’s equity statement time period

A statement of owner’s equity is usually prepared after the income statement. It shows the amount of equity for a given reporting period, which is usually a year. A typical owner’s equity statement will include:

• The company’s name
• The title of the report, which explains the type of business 
• Details about the period covered

Ensure your SMB is in good financial standing

An owner’s equity total that increases year to year is an indicator that your business has solid financial health. Most importantly, make sure that this increase is due to profitability rather than owner contributions.

Be sure to take advantage of QuickBooks Live and accounting software to help with your statement of owner’s equity and other bookkeeping tasks.