Owner’s Equity

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.

Owners Equity

Formula

Owner’s Equity Formula = Total Assets – Total Liabilities
Owner’s Equity Formula

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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:

ParticularsAmount
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.

Owners Equity eg3

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:

ParticularsAmount
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
Note: In this example, the unrealized gainUnrealized GainUnrealized Gains or Losses refer to the increase or decrease respectively in the paper value of the company's different assets, even when these assets are not yet sold. Once the assets are sold, the company realizes the gains or losses resulting from such disposal.read more of $4,000 in ABC international Company will not be considered for the calculation of the equity of the shareholders because it is already considered in the Other Comprehensive Income)

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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 –

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