Owner's equity is one of the three main components of a sole proprietorship's balance sheet and accounting equation. Owner's equity represents the owner's investment in the business minus the owner's draws or withdrawals from the business plus the net income (or minus the net loss) since the business began.
Mathematically, the amount of owner's equity is the amount of assets minus the amount of liabilities. Since the amounts must follow the cost principle (and others) the amount of owner's equity does not represent the current fair market value of the business.
Owner's equity is viewed as a residual claim on the business assets because liabilities have a higher claim. Owner's equity can also be viewed (along with liabilities) as a source of the business assets.
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