Owner’s equity: definition and how to calculate it

Published Thursday 2 April 2026

Table of contents

• What is owner's equity?
• Why owner's equity matters
• How to calculate owner's equity
• What's included in owner's equity
• Examples of owner's equity
• Where to find owner's equity
• What is a statement of changes in equity?
• How Xero helps you track owner's equity
• FAQs on owner's equity

Key takeaways

• Calculate your owner's equity regularly by subtracting total liabilities from total assets to get a clear snapshot of your business's financial health and net worth.
• Use your owner's equity as a key indicator when applying for loans, attracting investors, or preparing to sell your business, as it demonstrates financial stability and growth potential.
• Track changes in your equity through the statement of changes in equity to understand how profits, losses, capital contributions, and withdrawals affect your business value over time.
• Monitor your equity at least quarterly to make informed business decisions, and focus on increasing revenue or reducing debt if your equity becomes negative.

What is owner's equity?

Owner's equity is the book value of your business, calculated by subtracting what you owe from what you own. This calculation reflects the standard classification of claims against a business as either liabilities or equity. It shows your net worth at any point in time.

Owner's equity doesn't tell you what your business would sell for. You won't know that until you negotiate with a buyer. But it gives you a clear snapshot of your financial position whenever you need it.

Why owner's equity matters

Understanding your owner's equity helps you make better business decisions. It shows whether your business is growing in value or losing ground.

Here's why owner's equity matters:

• Financial health indicator: shows your business's overall financial position at a glance.
• Loan applications: lenders use equity to assess whether your business can repay debt.
• Investor confidence: higher equity signals a stronger, more stable business.
• Business valuation: provides a starting point when you're ready to sell.
• Growth tracking: helps you see whether your business value is increasing over time.

How to calculate owner's equity

To calculate owner's equity, subtract your total liabilities from your total assets. The result is your equity.

• Assets: everything your business owns (cash, equipment, inventory, receivables)
• Liabilities: everything your business owes (loans, bills, taxes payable)
• Owner's equity: assets minus liabilities

The following formula shows how to calculate owner's equity:

Owner's equity formula

Use the formula above to work out your equity at any point in time.

When calculating owner's equity

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

Make sure you count all your assets and liabilities correctly. Here's what to include:

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

Assets (what you own):

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.

• Tangible assets: equipment, real estate, inventory, cash in the bank
• Intangible assets: intellectual property, brand value, goodwill
• Receivables: money owed to you by customers

Liabilities (what you owe):

• Loans: amounts owed to banks or lenders
• Payables: bills owed to suppliers
• Other obligations: wages owed to employees, taxes payable

What's included in owner's equity

Owner's equity includes everything you've invested in your business, plus accumulated profits, minus any withdrawals. Here's what makes up your equity:

Components that increase equity:

• Capital contributions: money or assets you've invested in the business
• Retained earnings: profits kept in the business from previous years
• Current year profit: net income from this year's operations

Components that decrease equity:

• Owner withdrawals (drawings): money or assets you've taken out of the business. For example, when a company buys back shares from its owners, the value of the transaction is deducted from equity.
• Current year losses: if expenses exceed revenue

Your equity changes whenever you add capital, earn profits, take withdrawals, or incur losses.

Examples of owner's equity

Here's a simple example using home ownership:

• Asset (house value): $300,000
• Liability (mortgage): $120,000
• Equity: $300,000 − $120,000 = $180,000

Your equity is what's left after subtracting what you owe from what you own.

Business example of owner's equity

Here's how owner's equity works for a small business:

Assets:

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

Liabilities:

• Loan on premises: $300,000
• Total liabilities: $300,000

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

Where to find owner's equity

Owner's equity appears on your balance sheet, listed after assets and liabilities. You can also find it on the statement of changes in equity.

Here's where to look:

• Balance sheet: shows your equity as a snapshot at a specific date.
• Statement of changes in equity: shows how your equity changed over a period.

What is a statement of changes in equity?

According to International Financial Reporting Standards (IFRS), a complete set of financial statements includes a statement of changes in equity. This is one of the main financial statements, and it shows how your owner's equity changed during a specific period.

The other three financial statements are:

• profit and loss (P&L)
• balance sheet
• cash flow statement

The statement of changes in equity connects your P&L to your balance sheet. It shows how your earnings for the year affect your overall business value.

Example of statement of changes in equity for sole proprietor

The following example shows how equity changes for a sole proprietor:

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

Example of statement of changes in equity for a partnership

The following example shows how equity changes for a partnership:

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

Example of statement of changes in equity for a company

The following example shows how equity changes for a company:

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.

How the statement of changes in equity is used

Most small business owners focus on the P&L and balance sheet for day-to-day decisions. These reports give you the details you need to manage performance.

The statement of changes in equity is useful when you need to:

• track how profits and withdrawals affect your business value over time
• prepare reports for lenders, investors, or potential buyers
• understand your overall financial position at year-end

How Xero helps you track owner's equity

Xero automatically calculates and tracks your owner's equity, so you always know where your business stands.

Here's how Xero helps:

• Automatic calculations: your balance sheet updates in real time as you record transactions.
• Clear reporting: see your assets, liabilities, and equity in easy-to-read reports.
• Statement of changes in equity: generated automatically based on your financial data.
• Anytime access: check your financial position from anywhere, on any device.

See how Xero makes tracking your owner's equity simple. Get one month free and gain confidence in your business's financial position.

FAQs on owner's equity

Here are answers to some common questions about owner's equity.

Is shareholder's equity the same thing as owner's equity?

Yes, shareholder's equity and owner's equity mean the same thing. The term you use depends on your business structure:

• Sole proprietors and partnerships: typically use "owner's equity".
• Companies and corporations: typically use "shareholder's equity".

Both terms refer to what's left after subtracting liabilities from assets.

Can owner's equity be negative?

Yes, owner's equity can be negative. This happens when your liabilities exceed your assets, meaning you owe more than you own.

Negative equity often occurs in early-stage businesses that have taken on debt to fund growth. It can also result from sustained losses over time. If your equity is negative, focus on increasing revenue, reducing expenses, or paying down debt to improve your position.

How often should I calculate owner's equity?

Review your owner's equity at least quarterly, or monthly if you're actively managing growth or preparing for financing. Most accounting software, including Xero, calculates it automatically on your balance sheet, so you can check it anytime.

What's the difference between owner's equity and cash in the bank?

Owner's equity is the total value of your ownership stake in the business. Cash in the bank is just one type of asset.

You can have high equity but low cash if your value is tied up in equipment, inventory, or receivables. Conversely, you might have cash on hand but still owe more than you own, resulting in low or negative equity.

How does owner's equity affect my ability to get a business loan?

Lenders look at your owner's equity to assess your business's financial stability. Higher equity suggests you have more resources to repay debt and can weather downturns.

Strong equity can help you qualify for better loan terms, while low or negative equity may limit your borrowing options or require personal guarantees. In some cases, a business can even use its equity directly to pay off the loan by issuing shares to the lender.

Do all transactions affect owner's equity?

Yes, most transactions affect your owner's equity. Here's how:

Transactions that increase equity:

• making sales and earning revenue
• receiving payments from customers
• investing additional capital into the business

Transactions that decrease equity:

• paying expenses and bills
• withdrawing money from the business
• taking on new debt