What is Owners Equity?

Previous lesson: Define Liability
Next lesson: The Accounting Equation and Financial Position




What is owners equity? Good question. It's a question many an accounting student has pondered.

Owner’s equity is officially defined as:

...the residual interest in the assets of the enterprise after deducting all its liabilities.

That's a slightly complicated definition. Here's a simpler one:

The owner’s equity is simply the owner’s share of the assets of a business.

owners equity

You see, assets can only ‘belong’ to two types of people: the first type is people outside the business you owe money to (liabilities), and the second is the owner himself (owner’s equity).

Owner’s equity, often just called equity, represents the value of the assets that the owner can lay claim to.

In other words, it's the value of all the assets after deducting the value of assets needed to pay liabilities.

In other words:

It is the value of the assets that the owner really owns.

ASSETS = EQUITY + LIABILITIES

Thus the accounting equation indicates how much of the assets of a business belong to, or are owned, by whom.

Hope that all makes sense now!

In our final lesson of this section we're going to relook the accounting equation and see how it relates to the financial position of a business.




Previous lesson: Define Liability
Next lesson: The Accounting Equation and Financial Position


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