What is Owner's Equity?

What is Owner’s Equity? Owner’s equity is one of the 3 vital segments of a sole proprietorship’s balance sheet and one of the main aspects of the accounting equation: Assets = Liabilities + Owner’s Equity. It depicts the owner’s investment in the trade minus the owner’s withdrawal from the trade + the net income since the business concern commenced.

Owner’s equity signifies the owner’s investment in the business minus the owner’s withdrawals from the business + the net income (or minus the net loss) after the business began.

Owner’s equity is seen as a continuing claim on the business assets because liabilities have a greater claim. Owner’s equity can also be seen (with liabilities) as a source of the business assets.

Related Link: Balance Sheet

The categorisation of Owner’s Equity on the Balance Sheet :

Owner’s equity is normally shown on the b/s (balance sheet) with 2 or 3 accounts. Namely :

Paid in capital

Preferred stock

Common stock

Paid in capital in excess of par value – preferred stock

Paid in capital in excess of par value – common stock

Paid in capital from treasury stock

Retained earnings

Accumulated other comprehensive income

Less: Treasury stock

= TOTAL OWNER’S EQUITY

How is Owner’s Equity Calculated?

Owner’s equity can be computed by adding all the trading assets (property, inventory, plant and equipment, capital goods and retained earnings) and deducting all the liabilities (debts and salaries, wages, creditors, loans). For instance, Computer Assembly Warehouse.

Now, let us presume that Ram owns a computer plant in Bangalore and he wants to know what is his equity in the trading concern. Ram’s balance sheet for the previous year depicts that the warehouse boundaries are estimated and valued at ₹ 1 million, the factory equipment is valued at ₹ 1 million, inventory at ₹ 800,000 and that debtors owe the business concern ₹ 400,000. The balance sheet also indicates that Rams owes the bank ₹ 500,000, the wages and salaries stand at ₹ 800,000 and creditors ₹ 800,000.

Hence, owner’s equity can be computed as follows :

Owner’s equity = Assets – Liabilities

Whereas :

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

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

Ram’s Equity = ₹ 3.2 million – ₹ 2.1 million = ₹ 1.1 million

Hence, the value of Ram’s worth in the enterprise is ₹ 1.1 million

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