Definition of Owner’s Equity: owner’s equity, often called net assets, is the owners’ claim over the company assets when the whole liabilities have been paid off. Thus, any assets designed to pay off creditors and still have excess money left over would be considered as owner’s equity.
When we talk about the sole proprietorship balance sheet, the Owner’s equity is one of the three main sections and components of the accounting equation. Thus we can say that Assets yields =liability + owner’s equity.
However, several different components can contribute to the owner’s equity formula. Now the owner’s capital controls the cumulative balance of draws, contribution, income, and losses. It could be to the business advantage (positive) or otherwise on the next few components.
Thus, it represents the owner’s investment in the business minus the owner’s draws or withdrawals from the business, plus the net income through the time the business began.
Thus, the owner’s equity is the business gain after they must have settled off their liabilities. It could be viewed as a source of business assets. This is why it is referred to as net assets.
How can I calculate the owner’s equity?
However, this is not difficult to calculate as long as you were able to account well. Thus, the owner’s equity can be calculated by adding up the owner’s capital account, current contributions, and current revenues and then subtract the withdrawals and expenses. Withdrawal is a state whereby an owner takes money or other assets out of the company. And that will surely posse an effect on the capital account and the owner’s equity.
Example
While accounting for your records of the month, assuming you recorded assets of $10,000 and liability of $ 30, 000. You then have to subtract the liability from the assets to be able to derive your owner’s equity. Thus the owner’s equity is $70, 000.
Following cost principles, the amount of owner’s equity should not be considered to be the fair market value of the business.
