What is Owner’s Equity?

Owner’s equity can be described as the rights of owners in the assets of the business. Owner’s equity describes the extent of a company’s ownership, i.e. the portion of the company held by the sole proprietor, the shareholders, etc. It is often considered to be a company’s net worth. Owner’s equity is the indication of the company’s financial health, as more owner’s equity depicts strong financial health and vice-versa.

Note: The term ‘owner’s equity’ is most appropriately used for sole proprietorship business, but can be termed as stakeholder’s equity in the case of a corporation.

Key takeaways for Owner’s equity:

• Owner’s equity is listed on the company’s balance sheet.
• Better owner’s equity shows the sound financial position of the company and vice-versa.
• Owner’s equity describes the extent of a company’s ownership.
• Owner’s equity grows when an owner increases its investment in the business.

What is included in Owner’s Equity?

Owner’s equity mainly includes the following categories, which either increase or decrease an owner’s overall equity:

1. Capital Investment from the Owner (increase): Many business owners start their business by investing their own money. So, their own money is included in the owner’s equity.

2. Retained Earnings (increase) & Reserves: Businesses generally keep retained earnings and make reserves as backup funds or internal sources of finance to be used against contingencies. There are situations when no contingencies arise, and as a result, it gets included in the owner’s equity.

3. Money Withdrawn by Owners (decrease): In sole proprietorship, owners can withdraw money from business as and when they want for any personal or other purposes. This withdrawal causes a decrease in the owner’s equity.

4. Losses Generated by Business (decrease): In today’s dynamic world, businesses are vulnerable to losses. Continuous losses erode owner’s equity.

5. Dividends and Distributions (decrease): Dividends and other financial distributions are paid from a business’s net income, which would otherwise go into retained earnings. Payment of dividends cause a decrease in the owner’s equity.

Owner’s Equity in Balance Sheet

Owner’s equity is calculated as the difference between assets and liabilities. It gets recorded in the balance sheet at the end of the accounting period. Assets are shown on the left side of the balance sheet and liabilities and Owner’s Equity are shown on the right side of the balance sheet.

Balance Sheet 
as on dd/mm/yyyy

Liabilities	Amount(₹)	Assets	Amount(₹)
Current Liabilities	XXXX	Current assets	XXXX
Non-current Liabilities	XXXX	Long term investments	XXXX
Owner’s Equity	XXXX

How is Owner’s Equity Calculated?

As Owner’s equity depicts the rights of the owners in the assets of the business. Owner’s Equity can be calculated by adding all the assets of the business and subtracting all the liabilities from it.

Owner’s Equity = Total Assets – Total Liabilities

Example:

Balance Sheet of ABC Ltd. 
as on dd/mm/yyyy

Liabilities	Amount(₹)	Assets	Amount(₹)
Current Liabilities	5,30,000	Current assets	2,30,000
Non-current Liabilities	1,50,000	Long term investments	80,000
Owner’s Equity (Assets-Liabilities)	2,10,000	Property, Plant and equipment	5,60,000
		Other assets	20,000
	8,90,000		8,90,000

What is Statement of Owner’s Equity?

Statement of Owner’s Equity is a financial document that represents the changes that are taking place in the Owner’s Equity over a period of time. Balance Sheet only depicts the closing balance of the Owner’s Equity but does not show how much the Owner’s Equity is changing and what are the reasons behind it. The statement of owner’s Equity depicts what are the reasons for the change in owner’s Equity.