What is Owners Equity?

What is Owners Equity?


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




What is owners equity?

It's a question many an accounting student has pondered.

Or just plain guessed at.

The official owners equity definition is:

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

But that's a pretty complicated definition.

Here's a simpler one:

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

Owners Equity diagram

You see, assets can only ‘belong’ to two types of people:

  1. People outside the business who you owe money to (debts, known in accounting as "liabilities"), 
  2. The owner himself (owners equity).

Owners 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 (debts).

In the diagram above, the assets amount to $60,000, but the value of the assets the owner can lay claim to is only $40,000. This is because there are liabilities (debts) of $20,000, so $20,000 of the assets will be needed at some point to pay off these debts.

In the simplest terms, owners equity is:

The value of the assets that the owner really owns. 


Owners Equity and the Accounting Equation

Let's take a look at the basic accounting equation again:

ASSETS = EQUITY + LIABILITIES

Since we've now defined all three of the elements of the accounting equation, including owner's equity, we can look at this equation now with a bit more insight.

So, what does the basic accounting equation really represent?

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

Simple as that.

Hope this puts the record straight about owners equity and the accounting equation once and for all.  :-)




Well, that's all we're going to cover in our lesson on "What is Owners Equity?"

Hope things are starting to make more sense now!

In the final lesson of this section (basic accounting concepts) we're going to relook the accounting equation and introduce a brand new concept.

Click here for the next lesson - the accounting equation and financial position.



See an example of an Owners Equity Transaction (Capital Investment)

Or check out the Statement of Changes in Owners Equity (one of the four key accounting reports)

Return from What is Owners Equity? to Basic Accounting Concepts 

Return to the Home Page 






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



Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)

Owners Equity Synonym 
Owner's equity is also called.....?

Accounting Equation Question:
Fill in the Blank
 
Owner's equity = ? + ? - ? I need answers for this question. Please help!

Accounting Equation & Owners Equity Question 
If an owner invests more money into the business do the assets increase or liabilities increase?

Financial Statements and Investors 
Q: How are the balance sheet, income statement, statement of owner's equity and statement of cash flow useful for investors? 1. Balance Sheet …

Is Equity and Capital the Same? 
Q: Is equity and capital the same ? A: No, they are not. Equity (or owner's equity ) is the owner's share of the assets of a business (assets …

Profit Distribution for a Partnership 
For example if profit last year shows $21,600. Shall I distribute this to the partners A & B for the beginning of 2009 - therefore it is an addition to …


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