Equity
Equity is what your business is worth after debts. Learn how to calculate it, its types and why it matters.
June 2023 | Published by Xero
Published Monday 31 August 2026
Table of contents
Key takeaways
- Equity is the value an owner would keep after settling every debt on the business and its assets.
- You calculate it with one sum: total assets minus total liabilities.
- Positive equity means your assets outweigh your debts, while negative equity means a business owes more than it owns and is generally considered insolvent.
- Equity rises as you earn profit, add assets and repay debt, and it falls as liabilities grow.
What is equity in business?
Equity is the money an owner would keep if they sold the business, after accounting for every debt owed on it or its assets. In short, it is the part of the business that truly belongs to you.
Owners track equity to make sure their debts do not outgrow the value of what they own. Positive equity means a sale would clear the debts with money left over, while negative equity means the proceeds would fall short and you would still owe money. A business with negative equity is generally considered insolvent, and in many places it is not legally able to keep trading once it reaches that point.
How to calculate equity in business
Equity comes from one straightforward formula: assets − liabilities. Work through these three steps to find yours.
- Add up your assets, such as cash, property, equipment, inventory and money owed to you by customers.
- Add up your liabilities, such as loans, unpaid supplier bills, tax due and wages owed to employees.
- Subtract total liabilities from total assets, and what remains is your equity.
Say a business owns ₱2,000,000 in assets and owes ₱1,200,000 in liabilities. Its equity is ₱800,000, and that figure belongs to the owner. The same logic applies to a single asset: if a delivery van is worth ₱900,000 and you still owe ₱350,000 on the loan, your equity in the van is ₱550,000.
Types of equity in business
Equity appears in several forms depending on how a business is structured and how profit is handled. The seven main equity accounts can be grouped into a few that most small businesses meet.
- Common stock: shares that give holders voting rights and a residual claim on the company's assets
- Preferred stock: shares that usually carry no vote but rank ahead for dividends
- Treasury stock: shares a company has bought back from investors, recorded as a reduction in equity
- Retained earnings: profit the business keeps and reinvests rather than paying out to owners
Sole proprietors and partnerships describe their stake as owner's equity, while companies and corporations describe it as shareholders' equity. Both mean the value left for owners once liabilities are settled.
Owner's equity, shareholders' equity and net worth
These three terms describe the same assets-minus-liabilities value in different settings. Owner's equity and shareholders' equity differ only in the type of business that uses them.
Owner's equity is also the net worth of a business. It reflects how much money would be left if the business closed, sold all its assets and settled its debts.
Positive, negative and zero equity
Equity can sit in one of three states, and each one tells you something different about financial health. Reading these signs early gives you time to act.
- Positive equity: assets are greater than liabilities, so the business is solvent and could clear its debts with value to spare
- Negative equity: liabilities are greater than assets, a warning sign of possible insolvency
- Zero equity: assets and liabilities are equal, leaving no cushion if costs rise
Sustained negative equity is a serious concern, and reviewing your short-term and long-term solvency helps you judge whether the situation is temporary or needs action.
How equity changes over time
Equity grows as a business does work, banks profit, buys equipment and adds facilities. Anything recorded as an asset on the balance sheet lifts equity, while liabilities such as unpaid bills, tax dues, loans and payroll reduce it.
Taking a loan to buy an asset is broadly neutral at first, because the value of the asset and the loan are roughly equal. Equity then rises as you repay the loan, and keeping a healthy buffer of funds for day-to-day costs makes that steady progress easier to sustain.
Equity financing vs debt financing
When you need funding, the choice usually comes down to equity financing or debt financing. Each affects your ownership and your obligations in a different way.
- Equity financing: you raise money by selling an ownership stake to an investor, so there is nothing to repay, but you give up a share of the business
- Debt financing: you borrow money that must be repaid with interest, so you keep full ownership but take on a fixed obligation
Many businesses use a mix of both, and tracking your balance of borrowing against owner capital helps you keep that mix healthy as you grow.
Why equity matters
Equity measures the net value of the business, which makes it relevant to several people beyond the owner. It comes up whenever someone needs to judge what the business is worth.
- Owners weighing up negotiations when selling the business
- Lenders who want confidence that you can secure loans
- Investors who want to know what their stake is worth
- Insurers who might underwrite the business
Keeping equity positive matters most of all, because a business with negative equity is generally considered insolvent and may not be able to keep operating.
Where equity is recorded and reported
Owner's equity is recorded at the bottom of the balance sheet, after assets and liabilities. It is worked out at the end of each accounting period and forms part of your end-of-year financial statements. Keeping your ledger balances in order keeps that figure accurate.
Equity also appears in the statement of changes in equity, one of the four main financial statements. Philippine businesses prepare these under Philippine Financial Reporting Standards (PFRS). The local standard-setter has adopted PFRS from International Financial Reporting Standards (IFRS), according to Deloitte's IAS Plus.
Track your business equity with Xero
Working out equity by hand takes time you would rather spend running the business. Xero pulls your assets and liabilities into a balance sheet and financial reports that update as you go, so your equity is always current. See how it works and get one month free today.
FAQs on equity
Here are quick answers to common questions small business owners ask about equity.
What is equity in simple terms?
Equity is the share of your business that you own outright, once every debt on it has been paid. It is what would be left for you if the business sold everything and cleared what it owes.
How is equity calculated?
Subtract total liabilities from total assets, using the figures on your balance sheet. The result is your equity at that point in time.
What are the four types of equity?
Four common types are common stock, preferred stock, treasury stock and retained earnings. Sole proprietors instead track a single owner's equity balance.
Can equity be negative?
Yes, equity is negative when liabilities are greater than assets, which means the business owes more than it owns. This is a common warning sign of insolvency and is worth reviewing quickly.
Does equity mean the same as profit?
No, profit is what your business earns over a period and appears on the profit and loss statement, while equity is your accumulated net worth at a single point on the balance sheet. Profit you keep in the business adds to equity as retained earnings.
Related terms
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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.