How to Calculate Owner's Equity: Definition, Formula & Examples

How to Calculate Owner's Equity: Definition, Formula & Examples
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  • 0:00 What Is Owner's Equity?
  • 1:38 Balance Sheets: Examples
  • 3:35 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

In this lesson, you'll learn how to calculate owner's equity. We'll explore the definition and formula of owner's equity through the lens of a hypothetical business, and take a look at some examples of how it appears on balance sheets.

Owner's Equity: A Real-Life Scenario

Sue has recently opened her own store, called Sue's Seashells. As the shop is based right on the beach, Sue stays busy with locals and tourists all year. In fact, she's so busy that she's been contemplating opening a second store a few miles north of her existing location.

When Sue goes to the bank to discuss financing, the loan officer asks about her owner's equity in Sue's Seashells. Luckily, Sue brought her balance sheet, which is a document that details a company's assets and liabilities. The balance sheet shows her owner's equity. Let's take a deeper look at owner's equity and how Sue was able to calculate it.

Sue is the sole owner of Sue's Seashells. Therefore, all of its assets and liabilities are also Sue's. The difference between the shop's assets and liabilities is called owner's equity. As a formula, it looks like this:

Owner's Equity = Assets - Liabilities

It's important to understand that owner's equity changes with the assets and liabilities of the company. For example, if Sue sells $25,000 of seashells to one customer, her assets increase by the $25,000. Her owner's equity increases, too. The balance sheet, which shows the owner's equity, is prepared for a specific point in time. For instance, a balance sheet may be prepared every December 31. As a result, it would show the assets, liabilities, and owner's equity as of December 31.

Balance Sheets: Examples

Sue is right on the middle of Florida's busy season, the winter. She has snowbirds from all across the northern states flying in to buy her seashells. Since it is January, she prepares a balance sheet listing her assets, liabilities, and owner's equity as of December 31 of the previous year.

The simplified version of the balance sheet looks like this:

Assets: $378,000

Liabilities: $78,000

What is her owner's equity? Using our formula (Owner's Equity = Assets - Liabilities) we see that $378,000 - $78,000 = $300,000.

It was just a year ago that the simplified balance sheet for Sue's Seashells looked like this:

Assets: $178,000

Liabilities: $78,000

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