What Is Owner’s Equity and How to Calculate It?

Introduction

There’s one number on your balance sheet that quietly tells the story of your business – owner’s equity. It’s the real answer to the question every entrepreneur eventually asks: 

How much of this business belongs to me?

If you’ve ever looked at your financial statements and felt unsure about what this term means or how to use it to your advantage, this blog is for you. We’ll walk through what owner’s equity is, how it’s calculated, how it impacts your growth, and how to improve it intentionally.

What Is Owner’s Equity?

Owner’s equity refers to the portion of a business that belongs to the owner after all debts are paid off. Also called owner equity or net worth, it’s the value left over when you subtract liabilities from assets.

If you sold everything the business owns and used the money to settle all its debts, the amount you’d be left with- that’s your owner’s equity.

It includes your initial investment, any additional contributions, profits that haven’t been withdrawn, and deducts losses or any money you’ve pulled from the business. The number moves as your business evolves.

And no, it’s not the same as profit. But we’ll get to that later.

Why Owner Equity Matters for Your Business

Owner equity is a financial figure and a signal. It reflects your economic strength, your ability to reinvest, and your resilience as a business.

Here’s why this number matters:

• It shows your financial control. Growing equity means your assets are building faster than your liabilities.
• It helps with funding. Banks and investors often check the owner’s equity to assess financial health.
• It helps in valuation. Thinking of selling your business? Your owner equity is a big part of the valuation puzzle.
• It’s yours. Unlike loans or revenue owed to others, this is the part of your business that truly belongs to you.

When your equity grows consistently, it becomes a quiet signal that your business is moving in the right direction.

The Owner’s Equity Equation in Accounting

The most common way to express this concept is through a simple formula of owner’s equity equation accounting:

Owner’s Equity = Assets – Liabilities

Here’s what goes into that:

• Assets: Everything the business owns- cash, inventory, equipment, real estate, accounts receivable.
• Liabilities: Everything the business owes: loans, credit lines, vendor payments, taxes.

Let’s say your business has assets worth $400,000 and liabilities of $250,000. The math is:

Owner’s Equity = $400,000 – $250,000 = $150,000

You can also look at it from the owner’s point of view:

Owner’s Equity = Capital Invested + Net Income – Withdrawals

Both versions give insight into how your equity has changed over time.

How to Calculate Owner’s Equity (With Example)

Let’s walk through it.

Imagine you started the year with an initial investment of $75,000 in your business. You earned a net profit of $90,000. Over the years, you took out $20,000 as a personal withdrawal.

Now apply the formula:

This means at year-end, your share in the business is worth $145,000.

Alternatively, if you’re looking at your balance sheet and see:

• Assets = $500,000
• Liabilities = $355,000

Then:

Owner’s Equity = $500,000 – $355,000 = $145,000

It matches. Different methods, same result.

This number keeps evolving with every new sale, expense, capital contribution, or distribution. That’s why tracking it regularly matters.

Owner’s Equity Statement: What It Includes

An owner’s equity statement gives a detailed breakdown of how equity changed over a specific period, usually a year. It works alongside your balance sheet to give a clearer view of owner-related financial activity.

Here’s what it typically includes:

• Beginning equity (what you started with)
• New capital contributions during the period
• Net profit or loss for the period
• Owner withdrawals (also called drawings or distributions)
• Ending equity (the final figure)

For sole proprietors and partnerships, this statement is especially important; it shows how much of the business remains in the owner’s hands after income, reinvestment, and expenses.

Tips for You: Boosting Owner’s Equity Smartly

Building owner equity doesn’t mean you need to grow your revenue at all costs. Often, it’s the little financial habits that add up.
 
 

Here’s how to boost your equity without burning out:

• Reinvest, don’t just withdraw

Keeping profits in the business helps equity grow. You don’t have to leave everything in, but think twice before pulling it all out.

• Pay down your liabilities.

Owner’s equity rises every time you reduce your business debt. Focus on manageable repayment plans and smart financing.

• Keep your books clean.

Sloppy records hurt your decision-making and your equity. Track income, expenses, and withdrawals accurately.

• Avoid unnecessary spending

Overspending on low-impact costs eats into profits. Small savings can have a big impact on long-term equity.

• Use your statement

Don’t just look at the balance sheet. Your owner’s equity statement tells you exactly where and how your value is changing. Use it to track your growth over time.

Final Thoughts

Owner’s equity is personal. It shows how much of your business truly belongs to you after everything else is stripped away. And that number? It’s shaped by every decision you make, every win, every withdrawal, every quiet reinvestment.

If you keep an eye on it, consistently- it becomes easier to spot what’s working and what’s quietly dragging your business down.

And if the numbers feel messy or unclear, don’t stress about doing it all alone. At Orbit Accountants, we help business owners make sense of this stuff – so you’re not just running the day-to-day, but actually building something solid underneath.

FAQs on Owner’s Equity

How do you calculate the owner’s equity?

You can calculate the owner’s equity using two formulas, depending on what you’re looking at. On a balance sheet, it’s usually:

Owner’s Equity = Total Assets – Total Liabilities

If you’re tracking how the equity changed over time, especially in small businesses, another formula is:

Owner’s Equity = Capital Invested + Profits – Withdrawals

Both reflect the same concept, the value that truly belongs to the owner after everything else is accounted for.

What is an owner of equity?

An owner of equity is the person or group that holds a financial stake in the business. In a sole proprietorship, it’s the business owner. In partnerships, equity is shared based on agreed percentages. For corporations, shareholders are the owners of equity through the shares they hold.

Does the owner’s equity count as income?

Owner’s equity isn’t considered income. While profits add to equity, the equity itself reflects ownership value, not earnings. It only becomes personal income when the owner takes money out of the business as a withdrawal or distribution.

Is the owner’s equity the same as profit?

Not exactly. Profit shows how much a business earns during a period. Owner’s equity is broader; it includes profits over time, plus the owner’s investments and withdrawals. Profit can increase equity, but they’re not the same thing.

How do you calculate the average owner’s equity?

To find average owner’s equity, use:

(Beginning Equity + Ending Equity) ÷ 2

It’s often used to measure return on equity or other financial performance ratios over a period.