Owner’s equity: What it is and how to calculate it

Published Tuesday 20 January 2026

Table of contents

• What is owner's equity?
• How to calculate owner's equity (or net worth)
• 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?
• Track your business equity with confidence
• FAQs on owner's equity

Key takeaways

• Calculate owner's equity using the simple formula of assets minus liabilities to determine your business's net worth at any point in time.
• Monitor your equity regularly as it serves as a key indicator of financial health that lenders and investors use to assess risk before providing funding.
• Track equity changes through your statement of changes in equity to understand how profits, investments, withdrawals, and taxes affect your business value over time.
• Use owner's equity calculations to make informed decisions about taking on debt, funding growth, or determining safe withdrawal amounts without compromising business stability.

What is owner's equity?

Owner's equity is the book value of your business after subtracting what you owe from what you own. It shows your net worth at any point in time.

Key uses:

• Business valuation: Starting point for sale discussions (not final sale price)
• Financial tracking: Monitor your net worth over time
• Performance measurement: See how business decisions affect equity

How equity changes:

• Increases: Customer payments, profits, new investments
• Decreases: Loan payments, expenses, owner withdrawals

Reporting: Changes appear in your statement of changes in equity, following International Financial Reporting Standards.

Owner's equity doesn't predict your business's sale price. That depends on negotiations with buyers. But it gives you a concrete measure of your financial position that you can calculate whenever needed.

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

Owner's equity calculation subtracts your business liabilities from your total assets.

Owner's equity formula

The formula is simple:

Assets - Liabilities = Owner's Equity

Here's how it works: Add up everything your business owns (assets), then subtract everything you owe (liabilities). The remaining amount is your equity.

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
• Trade payables: Amounts owed to suppliers
• Employee obligations: Wages and benefits due
• Tax obligations: Money owed to tax authorities

Examples of owner's equity

Personal example: A house worth £300,000 with a £120,000 mortgage.

Calculation:

• Asset: £300,000 (house value)
• Liability: £120,000 (mortgage debt)
• Owner's equity: £180,000 (£300,000 - £120,000)

Business example of owner's equity

Business example: A repair shop's equity calculation.

Assets:

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

Liabilities:

• Property loan: £300,000

Owner's equity: £400,000 (£700,000 - £300,000)

Why owner's equity matters for your business

Owner's equity is more than just a number on a report; it's a key indicator of your business's financial health. A positive and growing equity figure shows that your business is building value over time. It gives you a clear and simple measure of your company's net worth.

Understanding your equity helps you make smarter decisions. It can guide choices about taking on new debt, funding growth, or determining how much you can safely withdraw from the business without affecting its stability.

This figure is also critical to outsiders. Lenders and investors review owner's equity to assess risk and judge the financial health of your business before providing loans or funding.

Where to find owner's equity

You can find owner's equity in two key financial statements:

• Balance sheet: Listed after assets and liabilities sections
• Statement of changes in equity: Shows how equity changes over time

What is a statement of changes in equity?

A statement of changes in equity tracks how your business equity changes over time. It's one of four essential financial statements.

The four basic financial statements:

• Profit and loss (P&L)
• Balance sheet
• Cash flow statement
• Statement of changes in equity

Key function: This statement connects your P&L to your balance sheet by showing how annual earnings affect your total equity position.

Example of statement of changes in equity for sole trader

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

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

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

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

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.

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

The statement of changes in equity is most useful for understanding your annual equity movements, while other reports help more with day-to-day management.

For strategic decisions, focus on:

• P&L statement: Shows operational performance
• Balance sheet: Reveals financial position

Most small business owners prioritise these two statements for practical business management.

Track your business equity with confidence

Understanding your owner's equity is key to knowing your business's financial health. Xero makes it easy to track your assets and liabilities in real time, giving you a clear view of your net worth whenever you need it.

See how Xero can simplify your accounting and give you the confidence to make smarter decisions. Try Xero for free and take control of your finances today.

FAQs on owner's equity

Here are answers to some common questions about owner's equity and how it works in your business.

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

Yes, shareholder's equity and owner's equity are the same thing. The terminology depends on your business structure.

Business structure terminology:

• Sole traders and partnerships: Owner's equity
• Companies and corporations: Shareholder's equity

Both terms measure the same concept: your ownership value in the business.

How do I calculate the owner's equity statement?

An owner's equity statement covers the increases and decreases in the company's worth. It is calculated with the accounting formula of net assets minus net liabilities which equals owner's equity. Creating this statement relies on the accurate recording and analysis on your business's balance sheets.

Do all transactions affect the owner's equity?

Virtually every transaction your business makes has an impact on equity. Sales earn money and add to your assets, expenditures deplete assets and may increase liabilities.