Equity
Equity is what your business is worth once debts are paid. Here's how to work it out and why it matters.
June 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Equity is what’s left for the owner after you subtract total liabilities from total assets
- The accounting equation, assets = liabilities + equity, keeps your balance sheet in balance
- Positive equity means your business owns more than it owes, while negative equity means it owes more than it owns
- Equity moves up and down as you make profit, take drawings, repay debt, or invest more capital
What equity means
Equity is the value of your business that belongs to you once every debt is settled. In plain terms, the equity meaning is straightforward: it’s what you’d keep if you sold everything your business owns and paid off everything it owes.
Equity sits at the heart of the accounting equation, assets = liabilities + equity. That balance is why equity is sometimes called the owner’s stake or the book value of the business.
A positive figure shows your business owns more than it owes. A negative figure shows the reverse, and it can be an early warning that your business is heading towards insolvency.
How to calculate equity
To work out your equity, subtract your total liabilities from your total assets. The formula is equity = total assets minus total liabilities.
Say a Singapore café owner adds up everything the business owns, and it comes to S$120,000. The business owes S$70,000 across a bank loan and unpaid supplier bills, so the owner’s equity is S$50,000. Your total assets here include cash, equipment, stock, and money customers still owe you.
Here’s how that example breaks down:
- Total assets: S$120,000
- Total liabilities: S$70,000
- Equity: S$50,000
The result can also be negative. If the same café held only S$60,000 in assets but owed S$90,000, its equity would be negative S$30,000. That means the business owes more than it owns, which lenders and suppliers watch closely.
Equity vs owner’s equity vs net worth
These terms overlap, and for many small businesses they point to the same figure. The differences show up mainly in how and where each one is used.
- Equity: the general term for the owner’s stake in any business, shown at the foot of the balance sheet
- Owner’s equity: the equity in a sole proprietorship or partnership, tied to one or a few named owners
- Net worth: another word for equity, used most often when discussing the overall financial health of the business
Sole traders and partnerships handle this slightly differently from companies. Our guide to owner’s equity walks through how the stake is recorded and split between owners.
Why equity matters for your business
Equity tells you what your business is really worth, which shapes almost every big financial decision you make. Tracking it turns a vague sense of “how are we doing” into a clear number you can act on.
- Applying for finance: lenders look at your equity to judge how much risk they’re taking on.
- Bringing in investors: a buyer or investor uses equity as a starting point to value your business.
- Planning your next move: rising equity is a sign your business is building value, which helps you decide when to reinvest.
How equity changes over time
Equity isn’t fixed. It rises and falls as money flows through your business over each accounting period.
- Making a profit: profit you keep in the business adds to equity.
- Taking drawings: money you take out for personal use reduces equity.
- Repaying debt: paying down your liabilities lifts equity, because you owe less against the same assets.
- Investing more capital: putting more of your own money into the business raises equity.
Where equity is recorded
You’ll find equity at the bottom of your balance sheet, below assets and liabilities. It’s calculated at the end of each accounting period and forms part of your year-end financial statements.
Equity also appears in the statement of changes in equity. This is one of the main statements Singapore businesses prepare under Singapore Financial Reporting Standards (SFRS), which are based on the International Financial Reporting Standards (IFRS).
Track your equity with Xero
Keeping an eye on your equity is far easier when your numbers update themselves. Xero builds your balance sheet automatically as you reconcile transactions, so your assets, liabilities, and equity stay current without manual spreadsheets. Start today and get one month free to see exactly where your business stands.
FAQs on equity
Here are quick answers to some of the questions small business owners ask about equity.
What is equity in simple terms?
It’s the slice of your business that truly belongs to you. If you sold everything and cleared every debt, the cash left over would be your equity.
Can business equity be negative?
Yes. When your liabilities are larger than your assets, equity turns negative, which is a warning sign that your business may struggle to cover what it owes.
Is equity the same as the cash in your bank account?
No. Equity measures ownership value across all your assets, not money you can withdraw, since much of it may be tied up in equipment, stock, or property.
How often should you check your equity?
Reviewing it monthly alongside your balance sheet is a good habit, so you can spot trends early and act before a small problem grows.
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.