Owner’s Equity: What It Means and How to Calculate It

Published Wednesday 1 April 2026

Table of contents

• What is owner's equity?
• How to calculate owner's equity (or net worth)
• What's included in owner's equity
• Examples of owner's equity
• Why owner's equity matters for your business
• Where to find owner's equity
• What is a statement of changes in equity?
• Keep track of your owner's equity with the right tools
• FAQs on owner's equity

Key takeaways

• Calculate owner's equity using the simple formula of total assets minus total liabilities to determine your business's net worth at any point in time.
• Track your owner's equity regularly through your balance sheet and statement of changes in equity to monitor your business's financial health and make informed decisions about debt, investments, and withdrawals.
• Recognize that owner's equity represents book value, not market value, as it shows what your business is worth on paper rather than what someone might actually pay for it.
• Utilize accounting software to automatically calculate and update your owner's equity in real-time, reducing errors and providing accurate financial snapshots for lenders and investors.

What is owner's equity?

Owner's equity is the value of what you own in your business after paying all debts, formally defined by accounting bodies as the value of your total assets less total liabilities. It shows your business's book value or net worth at any point in time.

Owner's equity is different from the price you might sell your business for. That depends on negotiations with buyers. But it gives you a clear financial snapshot you can calculate anytime.

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

Owner's equity calculation subtracts what you owe from what you own. The formula is simple:

• Add up all assets: Everything your business owns

• Subtract all liabilities: Everything your business owes
• Result equals owner's equity: What's left belongs to you

Owner's equity formula

When calculating owner's equity

Accurate calculation requires counting all assets and liabilities correctly.

Assets include:

• Tangible assets: Equipment, real estate, inventory, cash

• Accounts receivable: Money customers owe you
• Intangible assets: Intellectual property, brand value

Liabilities include:

• Loans: Money owed to lenders
• Accounts payable: Money owed to suppliers
• Employee obligations: Wages, benefits owed
• Tax obligations: Money owed to tax authorities

What's included in owner's equity

Owner's equity isn't a single, static number. It changes based on the flow of money in and out of your business. For a sole trader, the main components that affect it are the sum of capital that has been contributed and retained profits:

• Owner's capital: The money you first invested to start the business
• Additional contributions: Any extra money you put into the business after the initial investment

• Retained earnings: Profits the business has made that are reinvested back into it, rather than being paid out.

• Owner's draws: Money you take out of the business for personal use, which reduces your owner's equity

Examples of owner's equity

Personal example: A house worth $300,000 with a $120,000 mortgage gives you $180,000 in equity.

Calculation breakdown:

• Asset: $300,000 house value
• Liability: $120,000 mortgage debt
• Owner's equity: $300,000 - $120,000 = $180,000

Business example of owner's equity

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

Business example: A repair shop with $700,000 in assets and $300,000 in debt has $400,000 in owner's equity.

Calculation breakdown:

• Total assets: $600,000 garage + $50,000 machinery + $50,000 inventory = $700,000
• Total liabilities: $300,000 owed on premises
• Owner's equity: $700,000 - $300,000 = $400,000

Why owner's equity matters for your business

Understanding your owner's equity gives you a clear picture of your business's financial health. It helps you:

• Measure performance: A growing equity figure over time usually means your business is becoming more valuable

• Secure funding: Lenders and investors look at owner's equity to assess risk. A healthy equity position can make it easier to get a loan.
• Make informed decisions: Knowing your net worth helps you decide if you can afford to take on debt, invest in new equipment, or take money out of the business.

Where to find owner's equity

Owner's equity appears on two key financial statements:

• Balance sheet: Shown after the assets and liabilities sections

• Statement of changes in equity: Shows how equity changed over time

Both statements help you track your business ownership value.

What is a statement of changes in equity?

A statement of changes in equity tracks how your ownership value changes over time, as it reports all changes to equity during a financial period, including transactions with owners. It connects your profit and loss to your balance sheet by showing how earnings affect equity.

The four basic financial statements are:

• Profit and loss (P&L): Shows earnings and expenses

• Balance sheet: Shows assets, liabilities, and equity
• Cash flow statement: Shows money in and out
• Statement of changes in equity: Shows how ownership value changes

The equity change formula shows how your ownership value moves:

Closing equity = opening equity + net profit − owner withdrawals − taxes

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.

This formula explains every dollar that increases or decreases your business ownership.

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

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

Keep track of your owner's equity with the right tools

Accounting software helps you calculate owner's equity quickly and reduces the chance of errors. Using accounting software simplifies the process by automatically tracking your assets, liabilities, and the changes in your equity on the balance sheet.

With a real-time view of your business's net worth, you can spend less time on bookkeeping and more time focusing on growth. See how you can run your business, not your books. Get one month free.

FAQs on owner's equity

Here are some common questions small business owners have about owner's equity.

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

Yes, they are essentially the same concept. 'Owner's equity' is typically used for sole traders and partnerships, while 'shareholder's equity' or 'stockholder's equity' is used for companies. Both represent the net worth of the business.

Does owner's equity tell me what my business is worth?

It tells you the 'book value' of your business, not its 'market value'. For example, research shows the relevance of book value has declined over time; by 2013, reported net profit and shareholders' equity could only explain approximately 50 per cent of a company's share price, down from over 90% in the 1950s.

Book value is based on your financial records (assets minus liabilities). Market value is the price someone would actually pay for your business, which can be influenced by factors like brand reputation, customer base, and future potential.

Can owner's equity be negative?

Yes. If a business's total liabilities are greater than its total assets, it will have negative owner's equity. This means the business owes more than it owns, so it may need to review its costs, funding and growth plans.

How often should I calculate owner's equity?

Your owner's equity is a line item on your balance sheet, which provides a snapshot at a specific point in time. With accounting software, this figure is updated in real time. It's a good practice to review your balance sheet and owner's equity at least monthly or quarterly to monitor your financial health.

What's the difference between owner's equity and cash flow?

Owner's equity is a measure of your business's net worth at a single point in time. Cash flow measures the movement of money into and out of your business over a period. A business can be profitable and have positive equity, but still face cash flow problems if customers don't pay on time.