Equity
Equity is what your business is worth after debts. Learn how to calculate it and why it matters.
June 2023 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Equity is what an owner keeps after debts are paid: the value of everything a business owns minus everything it owes.
- You calculate equity by subtracting total liabilities from total assets.
- Positive equity means a sale would clear your debts with money left over, while negative equity means it wouldn't.
- Owner's equity, shareholder's equity and net worth all describe the same thing.
What is equity in business?
Equity is what an owner keeps after debts are settled. Put simply, it's the value of everything a business owns minus everything it owes, so it's the money an owner would keep if they sold the business and paid off what's owed on it and its assets.
You track equity to make sure debts don't outgrow the value of your assets. Positive equity means the proceeds from a sale would clear your debts, with some left over. Negative equity means a sale wouldn't clear all your debts, so you'd still owe money.
A business that has negative equity is generally said to be insolvent. In many countries it's illegal to continue operating a business once it becomes insolvent, so it may not be legally able to continue.
How to calculate equity in business
You calculate equity by subtracting what a business owes from what it owns. This assets minus liabilities relationship is the basis of the accounting equation.
Start by adding up the value of all your assets, the things the business owns, like property, buildings, equipment, cash and money owed by customers. Then subtract everything the business owes to suppliers, employees, lenders and the tax office. What's left is your equity.
Here's a worked example. Say your business owns assets worth $250,000 in total and owes $180,000 across loans, unpaid bills and tax. Your equity is $250,000 minus $180,000, which comes to $70,000.
The same logic works for a single asset. If your business owns a truck, its equity is the book value of the truck minus any debt still owed against it, so a truck worth $40,000 with $15,000 left to repay holds $25,000 of equity.
Types of equity
In business, equity usually refers to the owner's stake once debts are covered. The label changes with your business structure, and it's worth separating business equity from other everyday uses of the word.
- Owner's equity: the owner's stake in a sole trader or partnership
- Shareholder's equity: the same stake in a company or corporation, where owners hold shares
- Home equity: the value of a property minus the mortgage owed on it, which is a personal asset rather than business equity
- Stock-market equity: shares traded on an exchange, a different sense of the word again
Owner's equity and shareholder's equity describe the same thing, because a shareholder is really just another name for an owner.
What equity is made up of
Equity isn't a single figure you put in; it builds from two main parts. Together they show what owners have put into the business and what the business has kept from its profits.
- Contributed capital: the money owners or shareholders have paid into the business, also called share capital in a company
- Retained earnings: the profits kept in the business rather than paid out to owners
You can read more about how kept profits build up over time in the glossary term on retained earnings.
Equity vs owner's equity vs net worth
These terms often appear side by side, which can make them seem different. They all describe the same value.
Equity and owner's equity are the same thing. In business it's more common to use the full term, owner's equity. It may be called shareholder's equity for a company or corporation, but a shareholder is really just another name for an owner.
Owner's equity is also the same as the net worth of a business. It reflects how much money would be left if the business was closed, liquidated with all assets sold, and its debts were settled. That figure is sometimes called the book value of the business.
Why equity matters
Equity measures the net value of the business, so it tells you and others what the business is really worth. That makes it relevant to several groups.
- Negotiations when selling a business
- Lenders who want to see that you can secure loans
- Investors who want to know what their investment is worth
- Insurers who might underwrite the business
It also helps to keep equity positive, since a business with negative equity is generally said to be insolvent and may not be legally able to continue. Comparing profit against equity, known as return on equity, is one practical way to gauge how hard your invested money is working.
How equity changes
Equity isn't fixed; it moves with the day-to-day work of the business. A few common events push it up or down.
Equity generally grows as a business does work, banks profits, buys new equipment, and builds or adds facilities. Anything recorded as an asset on the balance sheet adds equity to the business. Liabilities work the other way and reduce equity, and common ones include unpaid bills, tax dues, loans and payroll owed to employees.
Taking a loan to buy a new asset generally has a neutral effect on equity, because the value of the asset and the loan are roughly equivalent. Equity then goes up as the business gradually pays off the loan.
Where equity is recorded and how it's reported
Equity has a set place in your accounts and shows up in more than one report. That makes it easy to track from one period to the next.
Owner's equity is recorded at the bottom of the balance sheet, after the assets and liabilities. It's calculated at the end of each accounting period and forms part of your end-of-year financial statements.
Owner's equity is also reported in the statement of changes in equity. This is another of the four major financial statements produced as part of globally recognised International Financial Reporting Standards. For a fuller walkthrough, see the guide on owner's equity.
Track your business equity with Xero
When your assets and liabilities are up to date, your equity figure stays accurate and easy to find. Xero brings your finances together in one place and builds your balance sheet as you work, so you can see what your business is worth at any time.
Get a clear view of your equity and the numbers behind it, and start today when you get one month free.
FAQs on equity
Here are answers to some frequently asked questions about equity in business.
What does equity mean in business?
Equity is what an owner keeps after debts are paid, worked out as the value of everything the business owns minus everything it owes. It shows how much of the business truly belongs to the owner.
How do you calculate equity in a business?
Add up the value of all your assets, then subtract all your liabilities, and what's left is your equity. For a single asset, use its book value minus any debt still owed against it.
Can equity be negative?
Yes, equity is negative when a business owes more than its assets are worth. A business with negative equity is generally said to be insolvent and may not be legally able to continue.
Is owner's equity the same as shareholder's equity?
Yes, they describe the same stake in a business. Owner's equity is the usual term for a sole trader or partnership, while shareholder's equity is used for a company or corporation.
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.