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.
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. :-)
Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.
Difficulty Rating: Beginner
Quiz length: 3 questions
Time limit: 5 minutes
Important:The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.
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.