Equity
Equity is your assets minus liabilities: the value you keep in a business after its debts are paid.
June 2023 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Equity is the value an owner keeps in a business after its debts are paid, worked out as assets minus liabilities.
- You can calculate equity with a simple formula: equity = assets - liabilities.
- Owner’s equity, shareholder’s equity and net worth all describe the same figure.
- Lenders and investors look at equity and equity ratios to judge the financial health of a business.
What is equity?
Equity is your assets minus your liabilities: the value an owner keeps in a business once its debts are paid. Put simply, it’s the money you’d keep if you sold the business and cleared what you owe.
Positive equity means the proceeds from selling the business would clear its debts, with money left over. Negative equity means a sale wouldn’t cover everything, so you’d still owe money.
A business with negative equity, where what it owes is more than what it owns, can be a warning sign of insolvency. Rules on continuing to trade while insolvent vary by country, and directors may face restrictions, so it’s worth getting professional advice.
How to calculate equity in business
Working out equity is straightforward once you know the value of what your business owns and owes.
The equity formula is: equity = assets - liabilities.
Add up everything your business owns, such as property, equipment, cash and money owed by customers. Then subtract everything it owes to suppliers, employees, lenders and the tax authorities. What’s left is your equity.
For example, a business with $120,000 in assets and $70,000 in liabilities has $50,000 in equity. The same idea works for a single asset: if your business owns a truck, its equity is the market value of the truck minus any repayments you still owe on it.
What owner’s equity is made up of
Owner’s equity is usually built from two main parts. For a closer look, see our guide to owner’s equity.
- share capital: the money owners or investors put into the business in exchange for a stake
- retained earnings: the profits the business keeps rather than paying out to owners
Equity vs owner’s equity vs shareholder’s equity vs net worth
These terms come up a lot and can be confusing, but they largely describe the same thing.
Equity and owner’s equity mean the same thing, and in business the fuller term owner’s equity is more common. In a company or corporation, you’ll often see it called shareholder’s equity, since a shareholder is another word for an owner.
Net worth describes the same figure too. It reflects how much would be left if the business closed, sold all its assets and settled its debts.
Why equity matters
Equity measures the net value of your business, so it matters to several groups you might deal with. Equity can be relevant to:
- negotiations when you sell the business
- lenders who want to see you can secure a loan
- investors who want to know what their stake is worth
- insurers who might underwrite the business
Keeping equity positive matters too. A business with negative equity may face questions about whether it can keep trading, so it can be worth reviewing regularly.
How equity changes
Your equity isn’t fixed: it moves as your business trades, spends and borrows.
Equity tends to grow as your business does work, banks profits, buys equipment and adds facilities. Anything recorded as an asset adds equity, while liabilities reduce it. Common liabilities include unpaid bills, tax owing, loans and payroll owed to employees. For more on the two sides of this, see our guide to assets and liabilities.
Taking a loan to buy an asset is broadly neutral, because the value of the asset and the loan are usually similar. Your equity then rises as you pay the loan down.
Equity ratios lenders and investors look at
Lenders and investors often use a couple of simple ratios to judge how a business uses its equity.
Return on equity shows how much profit a business generates from its equity. You work it out as net income divided by shareholder’s equity, so a higher figure means the business is turning equity into profit more efficiently.
The debt-to-equity ratio compares what a business owes with what its owners hold. You work it out as total liabilities divided by equity, and a lower figure generally suggests the business leans less on borrowing.
How businesses raise equity
When a business needs funding, it can raise money in two broad ways.
Equity financing means bringing in owners or investors who provide money in exchange for a stake in the business. You don’t repay it like a loan, but you do share ownership and future profits.
Debt financing means borrowing money you repay over time, usually with interest. You keep full ownership, but you take on a liability. Many businesses use a mix of both.
Where equity is recorded and how it’s reported
Once you’ve worked out equity, it shows up in a couple of standard places in your accounts.
Owner’s equity sits at the bottom of the balance sheet, below assets and liabilities. It’s calculated at the end of each accounting period and forms part of your year-end financial statements.
Equity also appears in the statement of changes in equity, one of the main financial statements prepared under International Financial Reporting Standards (IFRS).
Track your business equity with Xero
Keeping an eye on equity is easier when your assets, liabilities and profits update in one place. With Xero, your balance sheet and financial statements stay current as you work, and you can get one month free.
FAQs on equity
Here are some frequently asked questions about equity to round out the basics.
Is equity the same as shareholder’s equity?
Yes, in a company or corporation the two mean the same thing. Shareholder’s equity simply names the owners as shareholders.
How do you calculate equity?
Subtract your total liabilities from your total assets. The result is the equity held in the business at that point in time.
Is stock a form of equity?
Yes, shares of stock represent an ownership stake, which is a form of equity. Holding stock gives you a claim on part of a company’s net assets.
What is return on equity?
It’s a measure of how much profit a business earns from its equity, found by dividing net income by shareholder’s equity. Investors use it to compare how efficiently similar businesses use their funds.
What is the debt-to-equity ratio?
It compares total liabilities with equity to show how much a business relies on borrowing. Lenders often use it to gauge financial risk before offering a loan.
Related terms
Learn more about equity
Handy resources
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Balance sheet template
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.