Owner’s Equity Definition and Example
Owner’s Equity Definition – ” It refers to the difference between the total assets of the company minus the total liabilities of the company”.
In simple words, it is the owner’s claim over the assets of business. Owner’s equity is one of the tree element in the Balance Sheet of the sole proprietor. However, in company it is known as shareholder’s equity. In simple words, it is the difference between the capital investment and drawings. Owner’s equity also consists of net income earned since the business began. However this is the theoretical aspect.
If we talk about mathematically, owner’s equity is the sum total of all the assets minus sum total of all the liabilities. There is also a possibility of having a negative owner’s equity. The most important thing to note is that, it changes with change in assets and liabilities.
Owner’s Equity Formula
Owner’s equity = Total Assets – Total Liabilities
Owners’ Equity Example
For understanding owner’s equity definition more clearly, let’s discuss an example. Sheena is a florist who has a small flower shop. The assets and liabilities in her Balance Sheet are given below –
Assets = 1,00,000
Liabilities = 60,000
Calculate Sheena’s owner’s equity?
Owner Equity = 1,00,000 – 60,000
Related Financial Terms of Owner’s Equity
- Shareholders Equity Meaning – Definition, Formula, Importance
- Equity Definition – Equity Formula and Example
Importance of Owner’s Equity
For growing the business, investment is required. And if you are a sole proprietors and want to expand your business, then you need money. Where this money comes? Obviously from banks. For getting loans from bank, you have to show your Balance Sheet. Banks prefer to provide loans to those who have large owner’s equity.
In addition to this, if owner wants to sell the business, then also owner’s equity plays an important role. A large owner’s equity attracts the high price for the business. The greater the owner retains the net profit, the higher the owner’s equity.
In addition to this, if business man withdraws money from the owner’s equity, it is a capital gain for him. And capital gains are taxable under Income Tax Act.