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Owners Equity Formula (Assets – Liabilities)
The term Owner’s Equity of a business refers to the proportion of the total value of the assets of a company that can be claimed by the owners of the business (sole proprietorship or partnership) and its shareholders (corporation). The formula of owner’s equity is computed by deducting the total liabilities from the total assets. In other words, the owner’s equity can be seen as the net value of a business or the amount that can be claimed by the owners if in case the assets of the company are liquidated while its debts are repaid.
The liabilities of a company represent the amount owed by the owner to lenders, creditors, investors and other individuals or institutions who contributed to the purchase of the asset. As such, it is a common financial metrics which is used by most of the analysts to assess the financial health of a company.
Mathematically, Owner’s Equity Formula is represented as,
Explanation of the Owner’s Equity Formula
The formula for the owner’s equity can be derived in the following two steps:
Step 1: Firstly, pull together the total assets and the total liabilities from the balance sheet.
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Examples of Owner’s Equity Formula (with Excel Template)
Let’s see some simple to advanced examples of Owner’s Equity formula (Assets – Liabilites) to understand it better.
Owner’s Equity Formula – Example #1
Let us consider an example of the calculation of the owner’s equity for a company called XYZ Limited owned by Travis and which is in the business of manufacturing soft drinks. As per the balance sheet of XYZ Limited for the financial year ended on March 31, 20XX, the total assets is $500,000 and the total liabilities is $350,000.
Therefore, the calculation using the owner’s equity formula will be as follows –
- Owner’s Equity Formula = $500,000 (Assets) – $350,000 (Liablities)
Owner’s Equity will be –
Therefore, the owner’s equity of XYZ Limited as on March 31, 20XX is $1,50,000.
Owner’s Equity Formula – Example #2
Let us consider another example of calculation of the owner’s equity for a company owned by Jack who runs a computer assembly plant in Hawaii. As per the balance sheet of the company for the financial year ended on March 31, 20XX, the following information is available. Determine the owner’s equity of the company.
Therefore, total assets as on March 31, 20XXcan be calculated as,
- Total assets = Factory equipment + Warehouse premises + Inventory + Accounts Receivable
- = $1,000,000 + $1,000,000 + $800,000 + $400,000
- = $3,200,000
Again,total liabilities as on March 31, 20XX can be calculated as,
- Total liabilities = Bank debt + Wages payable + Salaries payable
- = $500,000 + $800,000 + $800,000
- = $2,100,000
Finally, the owner’s equity calculation as on March 31, 20XX can be done as,
- Owner’s equity = Assets – Liabilities = $3,200,000 – $2,100,000
Therefore, the owner’s equity of the company as on March 31, 20XX stood at $11,00,000.
Owner’s Equity Formula Calculator
You can use the following Owner’s Equity calculator.
|Owner's Equity Formula =||Total Assets – Total Liabilities|
|0 – 0 =||0|
Relevance and Use of Owner’s Equity Formula
- It is important to understand the concept of an owner’s equity from an investor’s point of view because it represents the real value of one’s stake in an investment. The owner’s equity is equivalent to the shareholder’s equity and is available as a line item in the balance sheet of a company or a firm. The only distinction between an owner’s equity and shareholder’s equity is that Owner’s equity is used when it is a tightly held business while Shareholder’s equity is used in case of a widely held business.
- The promoters of a company are typically interested in the owner’s equity of the company, which is represented by their shares. Since, the owner’s equity is dependent on the total equity of the company, as such an owner who is concerned for his own earnings will also be concerned for the company. Further, purchase of stock of a company over a period of time, besides giving the privilege or the right to vote in a board of directors elections, will also yield capital gains for the owner and potential dividends. All these benefits eventually create an owner’s ongoing interest in the equity of the company.
- The value of an owner’s equity (Assets – Liabilities) in a business increases when the owners infuse capital to increase their capital contribution and fund business growth. Higher profits owing to increased sales or reduced expenses can also increase the value of the owner’s equity.
- On the other hand, capital withdrawals by the owner can result in a shrinking of the amount of the owner’s equity. It is to be noted that the withdrawals are considered as capital gains on which an owner must pay capital gains tax depending on the amount of capital withdrawn.
- The owner’s equity can also be reduced by taking a loan for the purchase of an asset for the business which is recorded as a liability on the balance sheet. The value of the owner’s equity of a company or firm may be positive or negative. An owner’s equity goes into negative when the value of liabilities of a business exceeds the value of its assets.
This has been a guide to what is Owner’s Equity Formula. Here we discuss how to calculate Owner’s Equity (= Assets – Liabilities) using practical examples and downloadable excel template. You can learn more about Accounting from the following articles –