What is equity in business?

Published Wednesday 17 June 2026

Table of contents

• Equity definition
• How to calculate equity in business
• Types of equity
• Equity vs owner's equity vs net worth
• Equity vs debt financing
• Why equity matters
• How equity changes
• How to build equity in your business
• Where equity is recorded and how it's reported
• Track your business equity with Xero
• FAQs on equity

Key takeaways

• Equity is the value left in your business after subtracting everything you owe from everything you own. It's a snapshot of your financial position at any point in time.
• You can calculate equity using a simple formula: total assets minus total liabilities. Your balance sheet tracks this automatically.
• Understanding equity helps you make better decisions about growth, funding, and when to sell your business. It also affects your ability to secure loans and attract investors.
• You can build equity by increasing profits, reinvesting in the business, and managing debt carefully. Tracking it regularly gives you a clearer picture of your progress.

Equity definition

Equity is the value of a business after subtracting all its debts. It represents the amount an owner would keep if they sold everything the business owns and paid off everything it owes.

If your business has positive equity, the proceeds from selling its assets would cover all debts, with money left over for you. Negative equity means the sale wouldn't cover your debts, and you'd still owe money.

A business with negative equity is considered insolvent. Under Australian law, specifically Section 588G of the Corporations Act 2001, company directors have a duty to prevent the business from trading while insolvent. Failing to meet this obligation can result in personal liability.

Tracking your equity regularly helps you stay on top of your financial health and avoid these situations before they become serious.

How to calculate equity in business

Calculating equity is straightforward once you know what your business owns and what it owes. The formula is:

Equity = Total assets − Total liabilities

Assets include everything your business owns that has value: property, equipment, vehicles, cash in the bank, and money your customers owe you. Liabilities are everything your business owes: supplier invoices, loans, tax obligations, and wages payable. This relationship is the basis of the accounting equation.

For example, if your business has $200,000 in total assets and $120,000 in total liabilities, your equity is $80,000. That's the net value of your business.

When it comes to a single asset, equity is the current value of that asset minus any debt against it. If your business owns a delivery van worth $30,000 and you still owe $12,000 on the loan, your equity in the van is $18,000.

Types of equity

The word "equity" shows up in several financial contexts. Here are the main types you're likely to come across as a business owner.

• Owner's equity: the value of a sole trader's or partnership's interest in their business, calculated as assets minus liabilities. This is the most relevant type for small businesses.
• Shareholder's equity: the same concept applied to companies and corporations. It represents the combined value of shareholders' ownership stakes.
• Home equity: the difference between a property's market value and any outstanding mortgage. If you use personal property as security for a business loan, home equity becomes relevant.
• Private equity: investment capital from firms or individuals that buy stakes in private businesses. Private equity investors typically look for businesses with strong growth potential.

Equity vs owner's equity vs net worth

These 3 terms are closely related, and in many situations they mean the same thing.

Equity and owner's equity both refer to the value left in a business after subtracting liabilities from assets. In business accounting, "owner's equity" is the more common term. For companies with multiple owners, it's called "shareholder's equity," but the concept is identical.

Net worth is another way of expressing the same idea. It reflects how much money would remain if the business closed, sold all its assets, and settled every debt. Whether you call it equity, owner's equity, or net worth, you're describing the same financial position.

Equity vs debt financing

When you need funding to grow your business, there are 2 main paths: equity financing and debt financing. Each works differently and affects your business in distinct ways.

Equity financing means selling a share of your business to an investor. You receive capital without taking on debt, but you give up partial ownership and a share of future profits. This can be a good option if you want to avoid loan repayments, but it means sharing control of your business.

Debt financing means borrowing money, usually through a bank loan or line of credit. You keep full ownership, but you take on a liability that needs to be repaid with interest. This increases your liabilities and temporarily reduces your equity until the loan is paid off.

Many small businesses use a mix of both. The right balance depends on your cash flow, growth plans, and how much control you want to retain.

Why equity matters

Equity gives you a clear measure of what your business is actually worth. It's relevant in several important situations.

• Selling your business: equity is a starting point for negotiations because it shows the net value a buyer is acquiring
• Applying for loans: lenders assess your equity to gauge whether your business can support additional debt
• Attracting investors: investors want to know what their stake is worth and whether the business is financially healthy
• Insurance: insurers may review equity as part of underwriting your business
• Legal compliance: Australian company directors have a legal duty under the Corporations Act 2001 to prevent the business from trading while insolvent

Monitoring equity over time also helps you spot trends. If equity is growing, your business is building value. If it's declining, it's a signal to review your expenses, pricing, or debt levels.

How equity changes

Equity isn't fixed. It shifts as your business earns revenue, takes on debt, acquires assets, or distributes profits.

Anything recorded as an asset on your balance sheet adds to equity: equipment purchases, cash savings, or money customers owe you. Liabilities work in the opposite direction: unpaid bills, tax obligations, loans, and wages payable all reduce equity.

Here's a practical example. Say your business starts the year with $150,000 in assets and $90,000 in liabilities, giving you $60,000 in equity. During the year, you earn $40,000 in profit (increasing assets) and take out a $20,000 loan to buy new equipment. The equipment adds $20,000 to assets, and the loan adds $20,000 to liabilities. Your year-end position: $210,000 in assets, $110,000 in liabilities, and $100,000 in equity.

Taking a loan to buy an asset is often neutral for equity in the short term, because the new asset and new liability are roughly equal. Equity grows as you pay down the loan over time.

How to build equity in your business

Growing your equity strengthens your financial position and makes your business more valuable over time. Here are practical steps to do it.

1. Increase your profits

Higher revenue and lower costs both flow through to equity. Review your pricing, reduce unnecessary expenses, and focus on your most profitable products or services.

2. Reinvest in the business

Instead of withdrawing all profits, reinvest a portion into equipment, technology, or inventory that increases your asset base.

3. Pay down debt

Reducing liabilities directly increases equity. Prioritise high-interest debt first to get the most benefit.

4. Avoid unnecessary borrowing

Only take on debt that will generate a return. Every new liability reduces your equity until it's repaid.

5. Track your finances regularly

Use your balance sheet to monitor equity month to month. This helps you spot problems early and measure progress toward your goals.

Cloud accounting software like Xero makes it easier to track these changes in real time, so you always know where your business stands.

Where equity is recorded and how it's reported

Owner's equity appears at the bottom of your balance sheet, below assets and liabilities. Your accounting software updates it at the end of each accounting period, and it forms part of your year-end financial statements.

You'll also find equity in the statement of changes in equity. This is 1 of the 4 major financial statements produced under the International Financial Reporting Standards (IFRS), which Australian businesses follow. It shows how your equity moved during the period, including contributions, withdrawals, and retained profits.

If you're using accounting software, your balance sheet updates automatically as you record transactions. You can also download a balance sheet template to get started. Learn more in the guide on owner's equity.

Track your business equity with Xero

Understanding your equity is a practical step toward running a stronger business. With a clear picture of what you own and what you owe, you can make better decisions about growth, funding, and your financial future.

Xero's cloud accounting software gives you real-time balance sheet reports, so you can check your equity position whenever you need to. Bank transactions flow in automatically, and your financial statements stay up to date without manual work. Get one month free.

FAQs on equity

Here are answers to common questions about equity in a business context.

What is the equity formula?

The equity formula is: Equity = Total assets − Total liabilities. It tells you the net value of a business after accounting for all debts.

What is the difference between equity and debt?

Equity represents ownership value in a business, while debt is money the business owes to others. Equity belongs to the owners; debt belongs to creditors.

Can a business have negative equity?

Yes. Negative equity occurs when a business's liabilities exceed its assets. In Australia, company directors have a legal duty under the Corporations Act 2001 to prevent trading while insolvent.

What is shareholder's equity?

Shareholder's equity is the value of all shareholders' ownership stakes in a company. It's calculated the same way as owner's equity: total assets minus total liabilities.

How does equity affect a business sale?

Equity provides a baseline for valuing a business in a sale. Buyers assess equity alongside factors like revenue, profitability, and growth potential to determine what they're willing to pay.

How often should you check your business equity?

Review your equity at least monthly using your balance sheet. Regular monitoring helps you spot trends early and make informed decisions about spending, borrowing, and growth.