Skip to content
Nika

What is Owner's Equity?

Owner's equity is the owner's residual interest in a business: what remains after total liabilities are subtracted from total assets. It represents the value the owner has actually put into and built up in the business, through capital contributions and retained profit, and it appears on the balance sheet as the balancing figure.

The accounting identity behind it is simple: assets equal liabilities plus equity. Rearranged, equity is assets minus liabilities. If a business owns €100,000 of assets and owes €60,000, the owner's equity is €40,000. That number is not cash sitting somewhere; it is the accounting measure of the owner's claim on the business after everyone else has been paid.

Owner's equity changes constantly. It rises when the owner injects capital or the business earns profit, and falls when the business loses money or the owner draws money out. For a sole trader or small company this is the number lenders look at to judge whether the business is genuinely solvent, because it shows how much of the business's value actually belongs to the owner rather than to creditors.

Example

A freelance designer owns equipment worth €8,000 and has €2,000 in the bank, but owes €3,000 on a business credit card. Total assets are €10,000 and liabilities are €3,000, so owner's equity is €7,000, the value of the business that truly belongs to the designer.

Questions

What is the formula for owner's equity?

Owner's equity equals total assets minus total liabilities. It is the residual amount that would remain for the owner if the business sold every asset and settled every debt.

Why does owner's equity change over time?

It rises with owner capital contributions and profits, and falls with losses and owner withdrawals. It is not a fixed number; it is the running measure of how much of the business's value belongs to the owner.

See how Nika handles this

Related terms