Owner's equity: what it is and how to calculate it

Published Monday 20 April 2026

Table of contents

• What is owner's equity?
• How to calculate owner's equity (or net worth)
• What are the main components of owner's equity?
• Examples of owner's equity
• Why owner's equity matters to your business
• Where to find owner's equity
• What is a statement of changes in equity?
• FAQs on owner's equity

Key takeaways

• Calculate your owner's equity regularly by subtracting your total liabilities from your total assets — this single number tells you what your business is truly worth after all debts are paid.
• Monitor your equity balance over time to assess your business health: growing equity signals your business is building value, while shrinking equity is a warning to cut expenses, increase revenue, or reduce debt.
• Use your statement of changes in equity to understand exactly what caused your equity to rise or fall during a period, including profits earned, money invested, and withdrawals taken.
• Keep your equity position in mind before taking out loans or seeking investment, as banks and investors will review it when deciding whether to lend to or invest in your business.

What is owner's equity?

Owner's equity is the value of your business that belongs to you after paying off all debts. It's officially defined as the residual interest in the assets of the entity after deducting all its liabilities. It represents your ownership stake, calculated by subtracting what you owe (liabilities) from what you own (assets).

Think of it like home ownership. If your house is worth $500,000 and you still owe $200,000 on the mortgage, your equity in the home is $300,000. The same principle applies to your business.

Owner's equity shows up on your balance sheet and changes over time as your business earns profits, takes on debt, or pays out withdrawals. It's sometimes called net worth, net assets, or shareholders' equity (in companies with multiple owners).

How to calculate owner's equity (or net worth)

Owner's equity equals your total assets minus your total liabilities. This formula shows what your business is worth after all debts are paid.

To calculate owner's equity:

1. Add up all assets: Include cash, equipment, inventory, and accounts receivable.
2. Add up all liabilities: Include loans, bills, and accounts payable.
3. Subtract liabilities from assets: The result is your owner's equity.

Owner's equity formula

Assets are everything your business owns that has value:

• Tangible assets: cash, equipment, real estate, inventory, accounts receivable
• Intangible assets: intellectual property, brand value, patents

Liabilities are everything your business owes:

• Loans and debts: bank loans, credit lines, mortgages
• Unpaid bills: supplier invoices, employee wages, tax obligations

What are the main components of owner's equity?

Understanding the components of owner's equity helps you track how your business value changes over time.

Owner's equity consists of the money you invest in your business plus any profits you keep rather than withdraw. For most small businesses, four main components determine your total equity position.

The main components include:

• Initial investment: Money you put in when starting the business
• Retained earnings: Profits the business has earned and kept, not withdrawn by owners
• Additional investments: Extra money you've added to the business over time
• Owner withdrawals: Money you've taken out, which reduces equity

Assets: what your business owns

Assets are resources your business owns that have monetary value. They contribute to your business worth and appear on the left side of your balance sheet.

Common business assets include:

• Cash: Money in bank accounts and on hand
• Equipment: Vehicles, machinery, and tools
• Property: Buildings and real estate
• Inventory: Products available for sale
• Accounts receivable: Money customers owe you

Liabilities: what your business owes

Liabilities are financial obligations your business owes to others. They represent debts that must be paid and appear on the right side of your balance sheet.

Common business liabilities include:

• Loans: Bank loans and lines of credit
• Accounts payable: Money owed to suppliers
• Credit card debt: Outstanding balances on business cards
• Wages payable: Salaries owed to employees
• Tax obligations: Amounts owed to the government

Examples of owner's equity

Owner's equity works the same way whether you're calculating personal wealth or business value. Here's how the formula applies in practice.

Personal example: If you own a house worth $300,000 with a $120,000 mortgage:

• Asset: House value = $300,000
• Liability: Mortgage debt = $120,000
• Your equity: $300,000 − $120,000 = $180,000

Business example

Here's how a repair shop would calculate owner's equity:

Total assets:

• Garage: $600,000
• Machinery: $50,000
• Inventory: $50,000
• Total assets: $700,000

Total liabilities:

• Premises loan: $300,000

Owner's equity: $700,000 - $300,000 = $400,000

Why owner's equity matters to your business

Tracking your owner's equity helps you understand your business's financial position and make better decisions about growth and funding.

Owner's equity tells you what your business is actually worth after all debts are paid. Tracking it helps you make smarter decisions about growth, funding, and personal finances.

Understanding your equity position helps you:

• Assess business health: A growing equity balance shows your business is building value over time.
• Prepare for funding: Banks and investors review equity when evaluating loan applications or investment opportunities.
• Plan withdrawals: Know how much you can take out without weakening the business.
• Track progress: Compare equity over time to measure whether your efforts are paying off.
• Value your business: Calculate what your ownership stake would be worth if you sold.

If your equity is shrinking, it's a signal to review expenses, boost revenue, or reduce debt before the situation worsens.

Statement shows closing equity is equal to the opening equity plus the year’s net profit, minus owner withdrawals and taxes.

Where to find owner's equity

Your accounting software generates financial reports that show your owner's equity in two key places.

Owner's equity appears in two key financial reports that your accounting software generates automatically.

You can find it:

Statement shows closing equity is equal to the opening equity plus the year’s net profit and money introduced, minus owner withdrawals and taxes.

• On your balance sheet: Listed after assets and liabilities, showing your current equity position at a specific date.
• On your statement of changes in equity: Showing how equity changed over a period and what caused the increases or decreases.

What is a statement of changes in equity?

Statement shows closing equity is equal to the opening equity plus the year’s net profit and money from investors, minus owner withdrawals and taxes.

A statement of changes in equity tracks how your owner's equity increased or decreased during a specific period. It provides a reconciliation of the carrying amount from the beginning to the end of the period. It connects your profit and loss statement to your balance sheet by showing exactly what caused your equity to change.

This statement is one of four main financial reports your business should produce:

• Profit and loss (P&L): Shows income and expenses over a period.
• Balance sheet: Shows assets, liabilities, and equity at a point in time.
• Cash flow statement: Tracks money moving in and out of the business.
• Statement of changes in equity: Shows how equity changed and why.

The statement calculates your closing equity using this formula:

Closing equity = Opening equity + Net profit + New investments − Owner withdrawals − Taxes

Example of a statement of changes in equity for a sole trader

This statement shows your closing equity equals your opening equity plus the year's net profit and money introduced, minus owner withdrawals and taxes.

Example of a statement of changes in equity for a partnership

This statement shows your closing equity equals your opening equity plus the year's net profit and money from investors, minus owner withdrawals and taxes.