Owners Equity is owner's ownership (equity) in the business, or the amount of the business assets owned by the business owners. The calculation for owners equity is assets minus liabilities. In a simplified example, if the value of the business assets is $3,500,000 and the total business liabilities are $2,500,000, the owners equity is $1,000,000. These values are expressed on the business balance sheet, which shows assets on the left and liabilities and owners equity on the right.
Owner's equity is expressed differently in each type of business:
- In a sole proprietorship or partnership, it is expressed as the owner's or partner's capital account
- In a corporation, it is expressed as retained earnings.
Owner's equity is increased by (a) increases in owner capital contributions, or (b) increases in profits of the business. This is oversimplified, but basically the only way an owner's equity/ownership can grow is by investing more money in the business, or by increasing profits through increased sales and decreased expenses.
If a business owner withdraws money from owners equity, the withdrawal is considered a capital gain and the owner must pay capital gains tax on the withdrawal.
