Owner's equity: formula, examples and how it works

Published Tuesday 21 April 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 your owner's equity regularly by subtracting your total liabilities from your total assets, making sure to include all tangible assets, accounts receivable, intangible assets, loans, and tax obligations for an accurate picture of your business's net worth.
• Use owner's equity as a starting point for business valuation and funding conversations, as lenders and investors review this figure to assess risk before offering loans or investment, but recognise that it does not determine your final sale price.
• Track changes in your equity over time using the statement of changes in equity, which shows how profits, capital contributions, withdrawals, and dividends affect your overall financial position across a given period.
• Rely on your balance sheet and profit and loss statement for day-to-day financial decisions, and use your statement of changes in equity for strategic planning to understand whether your business is building or losing value over time.

What is owner's equity?

Owner's equity is the value of your business after subtracting what you owe from what you own. It's calculated as assets minus liabilities, giving you a clear measure of your net worth at any point in time.

Use owner's equity to:

• value your business: establish a starting point for sale discussions (not the final sale price)
• track your finances: monitor your net worth over time
• measure performance: see how business decisions affect equity

What changes your equity:

• increases when: customers pay invoices, profits accumulate, or you invest more capital
• decreases when: you repay loans, incur expenses, or withdraw funds from the business

Changes appear in your statement of changes in equity, following International Financial Reporting Standards, though for UK businesses, Financial Reporting Standard (FRS) 102 Section 22 sets out specific requirements for classifying financial instruments as either liabilities or equity.

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)

Calculate owner's equity by subtracting your total liabilities from your total assets. The result shows how much of your business you truly own.

Owner's equity formula

Owner's equity = Assets - Liabilities

Add up everything your business owns (assets), then subtract everything you owe (liabilities). The remaining amount is your equity.

When calculating owner's equity

Getting an accurate figure means counting all assets and liabilities correctly.

Assets to include:

• tangible assets: equipment, real estate, inventory, and cash
• accounts receivable: money customers owe you
• intangible assets: intellectual property and recognised brand value

Liabilities to 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

Here's a simple personal example to illustrate the concept. Imagine a house worth £300,000 with a £120,000 mortgage.

The calculation works like this:

• asset: £300,000 (house value)
• liability: £120,000 (mortgage debt)
• owner's equity: £180,000 (£300,000 - £120,000)

Here's how the same calculation works for a business.

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 shows your business's financial health at a glance. A positive and growing figure means your business is building value over time.

Why it matters:

• guides financial decisions: helps you decide whether to take on debt, fund growth, or withdraw funds safely
• attracts funding: lenders and investors review equity to assess risk before providing loans or investment
• tracks progress: shows whether your business is gaining or losing value over time

Where to find owner's equity

Owner's equity appears in two key financial statements:

• balance sheet: look for it listed after the assets and liabilities sections
• statement of changes in equity: check here to see 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 a specific period. It connects your profit and loss statement to your balance sheet by showing how annual earnings affect your total equity position.

This statement is one of four essential financial reports:

• profit and loss (P&L): shows revenue and expenses
• balance sheet: shows assets, liabilities, and equity
• cash flow statement: shows money coming in and going out
• statement of changes in equity: shows how equity moves over time

Here are examples of how the statement of changes in equity looks for different business structures.

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 sole trader

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

The statement shows that closing equity equals opening equity plus the year's net profit, minus any owner withdrawals and taxes paid.

Partnerships have a slightly different format.

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.

Example of statement of changes in equity for a partnership

The statement shows that closing equity equals opening equity plus the year's net profit and capital introduced, minus any partner withdrawals and taxes paid (note that if a partner has loaned money to the partnership as opposed to introducing capital, the loan carries a 5% yearly interest charged in the income statement).

Companies use different terminology in their statements.

Example of statement of changes in equity for a company

The statement shows that closing equity equals opening equity plus the year's profit and share capital issued, minus any dividends paid and taxes.

Now that you've seen the formats, here's how to use this statement in practice.

How the statement of changes in equity is used

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

For strategic decisions, focus on:

• P&L statement: review this to understand operational performance
• balance sheet: check this to see your overall financial position

Many small business owners focus frequently on the profit and loss statement and balance sheet for management purposes.

Track your business equity with confidence

Understanding your owner's equity helps you know where your business stands financially. 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.

Simplify your accounting with Xero. Get one month 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, they're the same thing. The term you use depends on your business structure.

• Sole traders and partnerships: use owner's equity
• Companies and corporations: use shareholder's equity

Both terms measure your ownership value in the business.

How do I calculate the owner's equity statement?

The owner's equity statement shows increases and decreases in your business's worth over a period. Calculate it using the formula: assets minus liabilities equals owner's equity. Creating this statement relies on accurate recording in your balance sheet.

Do all transactions affect the owner's equity?

Yes, every transaction affects your equity in some way.