How to Calculate the Owner’s Equity in a Business

The dollar value of a business is referred to as its equity. When a business is organized as a corporation, the term used on the firm’s balance sheet is “stockholders’ equity.” For a small business such as a sole proprietorship or partnership, the term “owner’s equity” is used. Owner’s equity can grow when the owners reinvest profits in the business’s operations and when owners invest additional capital to expand the business.

Tip

Owner’s equity is calculated by subtracting the total debt obligations or liabilities from the total assets owned by the firm.

An Overview of Owner’s Equity

If you run or invest in a business, you need to know how to calculate owner’s equity. This measure of a firm’s value is reported each quarter and annually on the balance sheet, which is one of the standard financial statements firms must prepare. Owner’s equity is the book value of the business. One way to think of it is that book value or owner’s equity is the amount that would remain if the business were liquidated and all debts were paid off.

The balance sheet has three main sections. It lists a firm’s assets first, followed by a second section detailing the debts owed by the business, or liabilities. The final section states the owner’s equity, which is always equal to total assets minus total liabilities. This information helps business owners and investors evaluate the firm’s financial condition. You can also see how well the business is meeting its long-term goals by comparing the owner’s equity and other information to what was reported on previous balance sheets.

Assets and Liabilities

Before you can calculate the owner’s equity, you must find the total assets and liabilities of the business. Assets are anything the business owns. When you compute owner’s equity, start by listing the dollar value for each category of assets. Common items include cash and cash equivalents such as savings accounts. Accounts receivable and investments like stocks or bonds come next, followed by current inventory. Assets also include the value of all of the equipment, furniture, buildings and land the firm owns. On a balance sheet, the total value of assets are listed at the end of the section.

List the amount of each type of liability next. The debts a business owes are usually divided into current obligations like accounts payable and short-term loans. The current principal balances of mortgages and other long-term loans come next. Once you have listed all of the liabilities, add up the dollar amounts, and list the total at the end.

Calculate the Owner’s Equity

To calculate the owner’s equity for a business, simply subtract total liabilities from total assets. Suppose you find a firm has total assets equal to $500,000. The business has liabilities totaling $150,000. Subtract $150,000 from $500,000 to compute the owner’s equity of $350,000.