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.
You see, assets can only ‘belong’ to two types of people:
-
People outside the business who you owe money to (debts, known in accounting as "liabilities"),
- 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
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Previous lesson: Define Liability
Next lesson: The Accounting Equation and Financial Position
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