Owners equity refers to the assets that an owner or multiple shareholders can claim after deducting liabilities from the total assets. In simple terms, it’s the portion of assets that belong to the owner after paying all the debts. Owners equity should not be confused with the total value of your business as it only represents the ownership stake rather than the overall market or appraisal value of the business.

Now that you know what is meant by owner equity, here are the things included in it:

• Money Invested:

  It’s the amount the owner initially invested in the business, as well as any ongoing investments that keep the business running.

• Money Withdrawn:

  Owners equity also includes any assets that the owner has withdrawn from the company or over time.

• Money Owed:

  These are the liabilities or debts owed to creditors or other external parties like loans, account payables, and tax deductions.

• Net Profit:

  Net profit, or you can say net income, refers to the profit a company has earned since its inception and is added to owner equity.

If your company isn’t a sole proprietorship but a corporation, owner equity may also include:

• Retained Earnings:

  These are the net profits that are reinvested in the business instead of distributed to shareholders as dividends.

• Common Stock:

  It represents the ownership in a business and provides shareholders with the right to vote for choosing board directors, giving them a portion of the company’s profit through dividends.

• Preferred Stock:

• They have more priority over common stock as they have more rights on the company’s assets and receive more dividends.

The formula for calculating owners equity is given as:

Owner’s Equity = Total Assets – Total Liabilities

For example, if a business has total assets valued at $100,000 and total liabilities amounting to $40,000, the calculation for owner’s equity will be:

Owner’s Equity = $100,000 – $40,000

Owner’s Equity = $60,000

Here’s a more detailed example that will help you in the calculation of owner equity:

Let’s suppose Sarah owns a tech company called Tech Innovations and wants to know her equity.

Assets:

• Machinery: $50,000
• Computers: $30,000
• Office Furniture: $10,000
• Inventory: $20,000
• Accounts Receivable: $15,000
• Cash: $25,000

Total Assets = $50,000 + $30,000 + $10,000 + $20,000 + $15,000 + $25,000 = $150,000

Liabilities:

• Bank Loan: $40,000
• Accounts Payable: $15,000
• Salaries Payable: $5,000

Total Liabilities = $40,000 + $15,000 + $5,000 = $60,000

Now, let’s calculate Sarah’s Owner’s Equity:

Owner’s Equity = $150,000 – $60,000

Owner’s Equity = $90,000

This calculation shows that after subtracting all types of liabilities, including loans and payables, Sarah has an owner equity of $90,000.

Your equity statement is a very important document, and it shows the changes to the owner’s equity account over a specific time. Here are the things included in your equipment statement:

• Opening Balance of Your Equity Account
• Increase in Equity due to Profits Earned
• Decrease in Equity Attributing to Losses and Loans
• Closing Balance of the Equity Account

A negative equity balance is a threat to the stability of your business; therefore, you should follow the given tips to improve your owner equity:

One of the most important things you should do to improve owner equity is to pay your debts by paying more than the minimum balance on any loan. For instance, if you have taken a loan for manufacturing equipment, you can lower your overall debt by making large monthly payments or making extra payments whenever possible.

You should also focus on lowering your liabilities. For this, you should consider refinancing existing loans with lower interest rates or renegotiating terms with creditors for better repayment. This will keep liabilities in check, resulting in a healthier balance sheet and strengthening your accounting owner’s equity.

Cutting down on operational expenses is another way to increase owner equity. So, analyze your business overhead costs, such as the money spent on inventory management, rents, salaries, and utilities. By doing a thorough analysis, you can easily pinpoint areas where savings can be made without impacting business efficiency.

Here are the benefits of positive owner equity:

• Enhanced Financial Credibility: Positive owner equity reflects a healthy financial position and shows your company’s ability to meet all obligations, instilling confidence in lenders, investors, and stakeholders.
• More Growth Opportunities: With positive owner equity, you can benefit from many growth opportunities. Be it expanding operations, launching new products, or diversifying into new markets, you can do all.
• Reduce Financial Risks: Good owner equity also acts as a buffer against all financial uncertainties. It gives you the strength to absorb potential losses and downturns without shaking the company’s stability.

Bookkeeping services or solutions are a great help in keeping track of owner’s equity. They help you in monitoring the resources, costs, and financial obligations of your company. You can also use them to monitor your overall cash flow and ensure the equity statement matches the company’s financial health.

Owners equity is an important factor that tells you about the financial condition of your business. You must accurately calculate your equity after a certain period and track changes in it.

If you feel overwhelmed by all the work associated with the calculation and tracking of your owner equity, Thank Heavens Bookkeeping takes all your worries away. We provide professional bookkeeping services and keep you updated on everything from your investments to net profit and losses incurred.

Get in touch with us and devote your time and energy to what you do best – running and expanding your business!