Definition of Owner’s Equity
Owner’s equity is one of the three main sections of a sole proprietorship’s balance sheet and one of the components of the accounting equation: Assets = Liabilities + Owner’s Equity.
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.
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.
Example of Owner’s Equity
If a sole proprietorship’s accounting records indicate assets of $100,000 and liabilities of $70,000, the amount of owner’s equity is $30,000.
Due to the cost principle (and other accounting principles) the amount of owner’s equity should not be considered to be the fair market value of the business.
