How to Calculate Owners’ Equity on a Balance Sheet

Owners’ Equity Definition

Owners’ equity is the total amount that the business owes to its owners (or if it is a legal entity, for its shareholders). It is also known as book value of a business. Essentially an organization owes to its owners, the initial amount of investment and subsequent gains and losses obtained by the business from its origination. If owners have withdrawn any amount from the business, that amount is also been adjusted accordingly. This investment and the gains and losses are represented by the assets and liabilities of the business. Therefore, owners’ equity ultimately represents the capital of the organization, which is theoretically available within the business to distribute for its shareholders.

How to calculate owners’ equity on a balance sheet

Calculating Owners’ Equity on a Sole Proprietor’s Balance Sheet

Owners’ equity represents the value that the owner can catch up after selling its assets and settling all the debts. This can be calculated by adding following values together.

Owners’ Equity = Initial Investment of the Owner + Donated Capital (If any) + Subsequent Gains – Subsequent Losses – Withdrawals by the owner


Calculating Shareholders’ Equity on an Incorporated Business’ Balance Sheet

Shareholders’ equity represents the value that remains within the business after liquidating all the assets and settling off all the debts. This remaining value is the amount that is distributed among the shareholders of the company. This can be calculated by adding together the balances of all equity accounts that appear in the balance sheet (Ex- common stock account, preferred stock account, retained earnings…etc. This can be simply depicted as follows.

How to calculate owners' equity on a balance sheet


Calculating Owners’ Equity on a balance sheet using Accounting Equation

This is an alternative approach to calculating owners’ and shareholders’ equity, using the values that appear on the balance sheet. This approach uses primary accounting equation to calculate owners’ or shareholders’ equity. This is a simple approach and can easily be applied to calculate both equity of sole proprietors and the shareholders of a company.

The accounting equation is,

Assets = Liabilities + Owners’ Equity

From this the formula to calculate owners’ equity can simply be derived as,

Owners’ Equity = Assets – Liabilities

The process to calculate owners’ equity on a balance sheet

This process involves three steps.

Step 01: Calculate the value of the total assets, both tangible and intangible. These asset values are calculated based on the current market value, not to the cost, with an adjustment for appreciation or depreciation.

Step 02: Calculate the value of total debts, both short-term debts and long-term debts.

Step 03: Subtract the value of total liabilities from the value of total assets. The answer may be positive or negative. If the value is positive, it is the amount that the owners or shareholders right. If the value is negative, it is the amount that the owner owes to the organization, in a sole proprietorship, and if it is an incorporated business entity, that is being obligated of the business itself.

About the Author: admin

Leave a Comment

Related pages

ferrous and nonferrous metals definitioncemetery and graveyardexamples of thermosetting plastics and thermoplasticsdefine adagesdifferences between anime and cartoonsdeception psychology definitionsaturated fat moleculeautosomes areevoke vs invokedefinition of nouns and pronounsproceed or procedesynonym diamantecyst vs tumordifference between sodium bicarbonate and bicarbonate of sodacyclone and tornado differencedifference between lecturer and assistant professor in indiaspinal and epiduralexamples of dispersion forcesnerd geek differencedifference between alaskan husky and siberian huskyhow is turner syndrome inheritedmodern cinquain poemslime versus lemondefine permittivityis bicarbonate soda the same as baking sodapyrimidine definitionthesaurus avoidthermosetting plastics propertiesexamples of finite and non finite verbstransnational corporations meaningmicrovilli structure and functiondifferent types of irony in literaturedefine aromatic compoundalumni singular formintonation stresstheism vs deismexample of unicameral legislaturewhat does confection meanchemical adsorption vs absorptionnz flag meaningantiparallel beta sheetdifferences between anaerobic and aerobic respirationcold blooded animals wikieukaryotic vs prokaryotic dnadifference between jealous and envioushow to tell between polar and nonpolarolfactory imagery exampleshow does anaphase i differ from anaphase iioxymoron in literaturenonessential proteinsthe difference between hdl and ldlwhat is the difference between a colon and semicolondefine static character in literaturede jure and de facto governmentdifferences between aerobic and anaerobicmulticellular definition biologytypes of adverbhomonym for fairthe word knowledge is an example of an abstract nounarchetypes examples in literaturefudge ganachestanza verse definitiondifference between lift and elevatorassonance poem definitionoperant conditioning pavlovwhat is the difference between seminar and workshopprophase 2 diagramdistinguish between phonetics and phonologydistinguish between elastic and inelastic collisionmalleability definition scienceconscious mind subconscious mindwriting a eulogy for a grandfatherare jungles and rainforests the samedependent dependant spellingwhat is normative statement in economicscouscous vs quinoawhat is the difference between polar and nonpolar bonds