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 liabilities are deducted from the value of total assets.
- The owner’s equity is among the three important sections of the balance sheet 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
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, debtors 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 formula 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 Earnings (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 Income
- = $ 45,000 + $ 23,000 + $ 16,500 + $ 4,800
- = $ 89,300
Video
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This has been a guide to Owner’s Equity and its definition. Here we learn to calculate Owner’s Equity using its formula along with step by step practical examples. You may learn more about financing from the following articles –
