What is owner's equity?
Owner's equity is what is left for the owners of a business once all liabilities are settled. It is calculated with one formula — assets minus liabilities — and represents the net value of the business.
The formula
Equity = Assets − Liabilities
Example
| Item | Value |
|---|---|
| Total assets | 500,000 |
| Total liabilities | 200,000 |
| Owner's equity | 300,000 |
What raises and lowers it
- Raises it: capital paid in by the owners, and retained profit.
- Lowers it: losses, and personal drawings by the owners.
Why it matters
It is the truest single measure of whether your business is growing over time. Rising revenue alone does not mean growth if liabilities are rising just as fast.
Frequently Asked Questions
Subtract total liabilities from total assets. If your assets are 500,000 and your liabilities are 200,000, equity is 300,000.
Yes. Retained profit increases equity, losses reduce it, and money the owners draw out personally reduces it too.
Yes, when liabilities exceed assets. It is a warning sign: the business owes more than it owns.
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