What is Owners Equity?

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Previous lesson: Liabilities: Definition and Examples 
Next lesson: The Accounting Equation and Financial Position

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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:

But that's a pretty complicated definition.

Here's a simpler one:

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 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:

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?

Simple as that.

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

Test Yourself

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.

Good luck!

This Form cannot be submitted until the missing fields (labelled below in red) have been filled in
Owner's Equity Mini Quiz:
Please note that all fields followed by an asterisk must be filled in.
1. The owners equity is the owner’s share of ____________________.*
a) The liabilities that need to be paid. b) The assets of a business. c) The accounting and related computer applications. d) None of the above. e) All of the above.
2. True or false: Owner's equity is the value of all the assets after deducting the value of assets needed to pay liabilities.*
a) True b) False
3. True or false: The basic accounting equation indicates how much of the assets of a business belong to, or are owned, by whom.*
a) True b) False
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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 

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Previous lesson: Liabilities: Definition and Examples 
Next lesson: The Accounting Equation and Financial Position

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