Owner’s Equity – Meaning
Owner’s equity is referred to as the rights of the owners in the assets of the business. The term owner’s equity is most appropriately used in case of a sole proprietorship business, but it can be known as stockholders equity or shareholders equity in case the business is structured as an LLC or a corporation.
Statement of Owner’s Equity
Statement of owner’s equity is a financial statement that reflects the changes taking place in the shareholders equity accounts over a period of time.
The balance sheet contains the ending balances of the owner’s equity, but it does not help in determining the reasons behind the changes occurring in the owner’s equity accounts.
The statement of owner’s equity helps the users of accounting information in identifying the causes that led to the changes in the owner’s equity accounts.
The ending balance of equity is carried forward and is treated as the opening balance of the next year.
Related Link :
Owners Equity Formula
The formula for owner’s equity is:
Owner’s Equity = Assets – Liabilities.
Assets, liabilities and subsequently the owner’s equity can be derived from a balance sheet.
Owner’s Equity in Balance Sheet
Owner’s equity is recorded in the balance sheet at the end of an accounting period. It is obtained as the difference between the total assets and liabilities. Assets are shown on the left hand of the balance sheet while the liabilities and owners’ equity is placed on the right hand side of the balance sheet.
Owner’s equity is represented as a net amount on the balance sheet as apart from contributing capital towards the business, owner’s can withdraw some amount.
How is Owner’s Equity Calculated?
Owner’s equity can be calculated by adding up all of the assets of the business and subtracting or deducting all the liabilities.
Let us take an example
Hari is the owner of a fertiliser company in Bangalore, and he wants to know about his equity in the business. The balance sheet for the previous years show that land for the fertiliser company is valued at 50 lakhs, equipment used in the factory is valued at 10 lakhs, and the debtors owe around 5 lakhs to the business.
In the balance sheet, some entries indicate that Hari owed money to the bank for a value of 15 lakh, needed to pay salaries and wages to the extent of 10 lakhs and owed creditors 5 lakh rupees.
Therefore, equity can be calculated as:
Owner’s equity = Assets – Liabilities
Assets = 50,00,000 + 10,00,000 + 5,00,000
= ₹ 65,00,000
Liabilities = 15,00,000 + 10,00,000 + 5,00,000
= ₹ 30,00,000
Owner’s equity = 65,00,000 – 30,00,000
= ₹ 35,00,000
Therefore, Hari’s value in the business is worth ₹35 Lakhs or 3.5 million
Click here: To Learn About Goodwill.
This concludes the article on the topic of Owner’s Equity, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.
Frequently Asked Questions on Owner’s Equity
Q1
How is owner’s equity calculated ?
Owner’s equity can be calculated by adding up all of the assets of the business and subtracting or deducting all the liabilities.
Q2
What transactions increase or decrease owner’s equity ?
Revenues and gains increase owner’s equity, whereas, expenses and losses cause the owner’s equity to decrease.
Q3
What is the importance of Owner Equity ?
Equity helps to build a large finance expansion in the company. Through funding business we sell our shares to investors in return for cash, thus expanding the business and this is called as “equity financing “.
Q4
What is owner’s equity on balance sheet?
The assets are shown on the left side while the liabilities and owner’s equity are shown on the right side of the balance sheet. The owner’s equity is always indicated as a net amount because the owner(s) has contributed capital to the business, but at the same time, has made some withdrawals.
