Owner’s equity

Definition

Owner's equity represents the owner's claim on the assets of a business after all liabilities have been deducted. It is calculated as total assets minus total liabilities and reflects the net worth of a business.

5 Must Know Facts For Your Next Test

1. Owner's equity increases when owners invest more capital into the business or when the business earns profits.
2. It decreases when owners withdraw funds or when the business incurs losses.
3. Common components of owner's equity include owner's capital, retained earnings, and additional paid-in capital.
4. The statement of owner's equity shows changes in equity over a specific period, typically a fiscal year.
5. Owner's equity is reported on the balance sheet under the section titled 'Equity' or 'Shareholders' Equity' for corporations.

Review Questions

• What are two main ways that owner's equity can increase?
• How is owner’s equity calculated?
• What financial statement details the changes in owner’s equity over a period?

Related terms

Assets: Resources owned by a business that are expected to provide future economic benefits.

Liabilities: Obligations of a business that it must settle in the future through transfer of assets or services.

Retained Earnings: Cumulative net income that has been retained in the company rather than distributed to its owners as dividends.