Owner’s equity is the amount that belongs to the owners of the business as shown on the capital side of the balance sheet and the examples include common stock and preferred stock, retained earnings. accumulated profits, general reserves and other reserves, etc.
What is Owner’s Equity?
The proportion of the total value of assets of the company, which can be claimed by the owners (in case of a partnership or sole proprietorship) or by the shareholders (in case of the corporation), is known as the Owner’s equity. It is a figure that arrived when the liabilitiesLiabilitiesLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more are deducted from the value of total assets.
- The owner’s equity is among the three important sections of the balance sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more of the sole proprietorship and is one of a component of the accounting equation.
- It is also said to be a residual claim on assets of the business because the liabilities have higher claims. Thus it can also be viewed as the source of business assets.
Formula
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For eg:
Source: Owner’s Equity (wallstreetmojo.com)
Examples to Calculate Owner’s Equity
Example #1
Fun time International Ltd. started the business one year back and at the end of the financial year ending 2018 owned land worth $ 30,000, building worth $ 15,000, equipment worth $ 10,000, inventory worth $5,000, debtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more of $4,000 for the sales made on the credit basis and cash of $10,000. Also, the company owes $15,000 to the bank as it took a loan from the bank and $5,000 to the creditors for the purchases made on a credit basis. The company wants to know the owner’s equity.
Owner equity = Assets – Liabilities
Where,
Assets = Land + building + equipment + inventory + debtors + cash
- Assets = $ 30,000 + $ 15,000 + $ 10,000 + $5,000 + $4,000 + $10,000 = $ 74,000
Liabilities = Bank loan + Creditors
- Liabilities = $ 15,000 + $ 5,000 = $ 20,000
Therefore, Calculation is as follows,
- Owner’s Equity = $ 74,000 – $ 20,000 = $ 54,000
Example #2
Mr. X is the owner of the machine assembly part in the US, and he is interested in knowing the owner’s equity of his business. The previous year balance of Mr. X shows the following details:
| Particulars | Amount |
|---|---|
| Assets of the business: | |
| Value of the factory equipment: | $ 2 million |
| Value of the premises having the warehouse: | $ 1 million |
| Value of the debtors of the business: | $ 0.8 million |
| Value of the inventory: | $ 0.8 million |
| Liability owed by the Business: | |
| Owes to the bank as loan: | $ 0.7 million |
| Creditors: | $ 0.6 million |
| Other liabilities: | $ 0.5 million |
Calculation Example of the Owner’ equity:
For calculation, accounting equation formulaAccounting Equation FormulaAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. read more will be used, which is as follows:
Owner equity = Assets – Liabilities
Where,
Assets = Value of the factory equipment + Value of the premises having the warehouse + Value of the debtors of the business + Value of the inventory
- Assets = $ 2,000,000 + $ 1,000,000 + $ 800,000 + $ 800,000 = $ 4.6 million
Liabilities = Bank loan + Creditors + Other liabilities
- Liabilities = $ 700,000 + $ 600,000 +$ 500,000 = $ 1.8 million
Therefore, Calculation is as follows,
- Owner’s Equity (i.e. Equity of Mr. X) = $ 4.6 million – $ 1.8 million = $ 2.8 million
Thus from the above calculation, it can be said that in the company, the value of the X’s worth is $ 2.8 million.
Example #3
The balance of Mid-com International shows the values as given below and wants to know the value of the owner’s equity at the end of the Financial Year 2018 using the same information.
The balance sheet details of Mid-com International are given below.
Calculation of the Owner’ equity for 2018
- Assets = $ 20,000 + $ 15,000 + $ 10,000 + $ 15,000 + $ 25,000+ $ 7,000+ $ 15,000 = $ 107,000
- Liabilities = $ 10,000 + $ 2,500 +$ 10,000 + $ 2,500 = $ 25,000
Therefore, the calculation is as follows,
- Owner’s Equity = $ 107,000 – $ 25,000 = $ 82,000
It is equal to the total of Common Stock and Retained EarningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more (i.e. $ 70,000 + $12,000)
Calculation of the Owner’ equity 2017
- Assets = $ 15,000 + $ 17,000 + $ 12,000 + $ 17,000 + $ 20,000+ $ 5,000+ $ 19,000 = $ 105,000
- Liabilities = $ 12,000 + $ 3,500 +$ 9,000 + $ 1,500 = $ 26,000
Therefore, the calculation is as follows,
- Owner’s Equity = $ 105,000 – $ 26,000 = $ 79,000
It is equal to the total of Common Stock and retained earnings (i.e. $ 70,000 + $9,000)
Example #4
The data related to XYZ International Company is as follows:
| Particulars | Amount |
|---|---|
| Common Stock: | $ 45,000 |
| Retained Earnings: | $ 23,000 |
| Preferred Stock: | $ 16,500 |
| Other comprehensive income: | $ 4,800 |
Investment in ABC International Company at the fair value: $ 14,000 (Original Cost being $10,000)
Calculation of the owner’s Equity:
Owner’s Equity = Common Stock + Retained Earnings+ Preferred Stock + Other Comprehensive IncomeOther Comprehensive IncomeOther comprehensive income refers to income, expenses, revenue, or loss not being realized while preparing the company's financial statements during an accounting period. Thus, it is excluded and shown after the net income.read more
- = $ 45,000 + $ 23,000 + $ 16,500 + $ 4,800
- = $ 89,300
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