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The owner's glossary

Owner's Equity

Owner’s equity is the recorded residual interest in a business after its liabilities are subtracted from its assets. It is a balance-sheet amount based on accounting values, not a sale-price estimate or a bank balance. Profit, losses, contributions and withdrawals can change equity, while market value may move differently.

Updated

Owner’s equity = total assets − total liabilities

Owner's equity is a balance-sheet figure representing what would be left for the owner if the business's recorded assets were used to pay off all recorded liabilities at their book values. The formula is: Owner's Equity = Total Assets - Total Liabilities. It is sometimes called net worth or book value of the business, but it is strictly an accounting figure, not an appraisal of what the business could sell for.

Examples use made-up numbers. Education only, not tax, legal or investment advice.

The setup

  • Illustrative example: a business shows $220,000 in total assets (cash, receivables, equipment, inventory) and $150,000 in total liabilities (loans, accounts payable, credit lines).

  • This $70,000 is what the books say the owner's stake is worth, based on historical cost accounting, not current market prices.

The math

  1. Owner's equity = $220,000 - $150,000 = $70,000.

Owner question to ask: "Does my owner's equity number reflect what my equipment and inventory are actually worth today, or outdated purchase prices?" Depreciated equipment often carries a book value far below its usable market value, which can understate equity, while obsolete inventory can overstate it.

Unique caveat: owner's equity must not be confused with sale proceeds or business valuation. A buyer values a business on its earning capacity (often using multiples of SDE or EBITDA), not on the balance sheet's owner's equity figure, so a business with low or even negative book equity can still sell for a meaningful price, and one with high book equity is not guaranteed to attract that price in a sale. Any comparison between owner's equity and a valuation estimate should be treated as two separate measurements answering two different questions.

This definition is educational and does not replace advice from a licensed accountant or tax professional familiar with your specific books. Owners should confirm treatment with their bookkeeper before using this figure in a loan application, valuation, or tax filing. Small differences in chart-of-accounts setup can change how this number is calculated, so consistency period over period matters more than precision in any single month.

Continue with the full explainer lesson.

Definition source

The definition above is based on SEC — Beginners’ Guide to Financial Statements, which describes revenue, cost of sales, gross profit, net income, equity and working capital. Percentages here are arithmetic ratios of those line items, not industry benchmarks.

Questions owners ask

Is owner’s equity the selling value of a business?

No. Book values and recorded liabilities do not establish what a buyer would pay.

Can equity be positive when cash is low?

Yes. Assets may be equipment, inventory or uncollected receivables rather than spendable cash.

Do owner withdrawals affect equity?

Yes. A draw reduces the owner’s recorded equity and cash; it is not automatically a business expense.

Sources