Equity
Understand what equity means, how to calculate it and why it matters for your business.
June 2023 | Published by Xero
Published Thursday 6 August 2026
Table of contents
Key takeaways
- Equity in business is the value left when you subtract what a business owes (liabilities) from what it owns (assets). It represents the owner's stake in the business.
- Positive equity means the business is worth more than it owes, while negative equity means debts exceed assets and the business may be insolvent.
- Owner's equity, shareholders' equity and net worth all refer to the same thing: the residual value belonging to the owners after liabilities are paid.
- Equity is recorded on the balance sheet and reported in the statement of changes in equity at the end of each accounting period.
What is equity in business?
Equity is the money a business owner would keep if they sold the business and paid off all its debts. It is what remains when you subtract what a business owes (liabilities) from what it owns (assets).
This figure represents the owner's true stake in the business. You may also see it called owner's equity, particularly for sole traders and partnerships.
Equity vs owner's equity vs net worth
Equity and owner's equity mean the same thing. In a company with multiple investors, it may be called shareholders' equity, but a shareholder is simply another word for an owner.
Owner's equity is also the same as a business's net worth. Both terms describe the residual value that belongs to the owners after all liabilities are settled. For a detailed breakdown, see how to calculate owner's equity.
How to calculate equity in business
The formula is straightforward: equity = assets – liabilities. Add up everything your business owns, then subtract everything it owes.
Assets include property, equipment, cash and money owed by customers. Liabilities include money owed to suppliers, employees, lenders and the tax authority.
For example, a small café in Hong Kong with HK$800,000 in assets and HK$300,000 in liabilities has HK$500,000 in equity. That figure represents what the owner would walk away with after selling the business and clearing all debts.
Positive and negative equity
Positive equity means selling the business would clear its debts with money left over for the owner. Negative equity means the sale would not cover the debts, leaving the owner still owing money.
A business with negative equity is often described as insolvent, because it does not have enough assets to cover its debts. Hong Kong has no law that bans trading while insolvent, but directors who keep running a clearly insolvent company have a duty to protect creditors' interests and can face personal liability if they do not.
Types of equity
Equity takes different forms depending on the context. Here are the most common types you may encounter:
- Owner's or shareholders' equity: the residual interest in a business after subtracting liabilities from assets
- Common shares: ownership stakes that give holders voting rights and a share of profits
- Preferred shares: ownership stakes with priority for dividends but typically no voting rights
- Retained earnings: profits kept in the business rather than paid out to owners
- Private equity: investment in companies that are not publicly traded
- Home equity: the portion of a property's value that the owner actually owns outright
- Brand equity: the commercial value derived from customer perception of a brand name
How businesses raise equity
Equity financing means raising money by selling shares in the business rather than borrowing. The investor receives an ownership stake in exchange for their capital.
Common sources of equity financing include:
- Angel investors
- Venture capital
- Private equity firms
- Equity crowdfunding
Why equity matters
Equity measures the net value of a business at a given point in time. This figure matters in several situations:
- Negotiations when selling a business
- Lenders deciding whether to offer loans
- Investors judging what their stake is worth
- Insurers underwriting the business
Positive equity signals financial health. Negative equity, by contrast, warns that the business may be insolvent and unable to meet its obligations.
How equity changes
Equity grows as a business trades profitably, retains earnings and buys assets. Liabilities reduce it. If you generate a healthy net profit and keep some of those earnings in the business, your equity rises.
Taking a loan to buy an asset is roughly neutral at first, since you gain an asset but also add a liability of the same value. As you repay the loan, the liability shrinks while the asset remains, and your equity increases.
Where equity is recorded and how it's reported
Owner's equity sits at the bottom of the balance sheet, below assets and liabilities. It is calculated at the end of each accounting period.
Equity also appears in the statement of changes in equity, which tracks movements over time. In Hong Kong, financial statements follow Hong Kong Financial Reporting Standards (HKFRS), which are aligned with International Financial Reporting Standards (IFRS).
Keep track of your equity with Xero
Xero's accounting reports help you see your equity and net worth at a glance. With real-time data and clear dashboards, you can monitor how your business is tracking without digging through spreadsheets.
Ready to take control of your finances? Get one month free and see how Xero makes it simple.
FAQs on equity
Here are answers to common questions about equity in business.
Is equity the same as owner's equity?
Yes. Both terms refer to the residual value of a business after liabilities are subtracted from assets. The term you use depends on the business structure.
Can equity be negative?
Yes. If liabilities exceed assets, equity becomes negative. This is a warning sign of balance-sheet insolvency and that the business may struggle to pay its debts.
Is equity an asset or a liability?
Neither. Equity is the residual interest in a business after liabilities are deducted from assets. It represents what belongs to the owners.
What is the difference between equity and assets?
Assets are everything a business owns, including cash, property and equipment. Equity is what remains after you subtract liabilities from those assets.
How is equity different from shareholders' equity?
They are the same concept. Shareholders' equity is simply the term used when a company has shareholders rather than a single owner.
Related terms
Learn more about equity
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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.