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.
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
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
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
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
The above mentioned is the concept, that is elucidated in detail about ‘What is Owner’s Equity?’ for the Commerce students. To know more, stay tuned to BYJU’S.