Owner's Equity: Definition and Examples
By Indeed Editorial Team
Updated September 15, 2021 | Published February 4, 2020
Updated September 15, 2021
Published February 4, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Understanding owner's equity, also called net assets, can be helpful in determining what you actually own after paying off any debts. Calculating owner’s equity can help you adjust and improve your profit margins for your small business.
In this article, we define owner's equity, outline how to calculate it and explain how you can improve your owner's equity.
What is owner's equity?
Owner's equity refers to the owner's investment in an asset after all liabilities have been deducted. In other words, it's the difference between the amount of assets and the value of liabilities that allows you to know what you own after paying off debts. Owner's equity can also be referred to as net worth or net assets. If it's a negative amount, it will be reflected on the balance sheet. Because liabilities take precedence over equity, failing to consider your liabilities will give you a false sense of what you really own. Though finding out owner's equity can be useful in determining your financial standing, it's important to note it's not representative of the true value of your ownership. This is due to various factors including the fact that owner's equity is reported at the time you calculated the equity and will need to be recalculated over time to determine gains or losses in value.
Related: Your Guide To Careers in Finance
Calculating owner's equity
Finding out your owner's equity can be a great way to determine your financial standing. You'll also be required to calculate it if you're seeking financial assistance from a lender or investor. It's important to recognize that your owner's equity won't be reflective of your asset's true market value.
Owner's equity can be calculated by deducting the liabilities from the value of an asset. In other words, use the following equation:
Owner's equity = assets - liabilities
For example, if you own a house for $500,000 but you owe $300,000 on a loan against that house, the house represents $200,000 of equity. If your assets increase, it can be said that your equity will also increase.
What to include in owner's equity
Because owner's equity is calculated by determining the difference between your asset's value and its liabilities, these two components make up owner's equity. Here's a look at both terms:
Asset: An asset refers to something you own. This can be anything from a house, car, boat, furniture, business or your personal belongings.
Liability: A liability is the financial debt accrued against your asset. For example, a loan you take out against your assets (such as a home or car loan), would be considered a liability.
If you own a corporation, owner's equity also consists of invested capital and retained earnings:
Invested capital: This refers to the funds invested by shareholders and debt holders in a business.
Retained earnings: Retained earnings is the amount of profit a company makes at a certain point in time after subtracting any dividends.
Combining invested capital with beginning and current retained earnings results in total owner's equity.
Owner's equity examples
Here are some examples that can help you better understand owner's equity in action:
Example 1: If you had a car worth $20,000 but you owe $5,000 against it, your owner's equity would be $15,000.
Example 2: Say you own a house for $500,000. Since purchasing your house, you owe the bank $100,000. Your assets, in this case, would be $500,000 and your liabilities would amount to $100,000. Because owner's equity is the difference between your assets and liabilities, your owner's equity in this circumstance would be $400,000.
Example 3: If your business' assets amount to $4 million and the liabilities are $3 million, the owner's equity, in this case, would be $1 million.
How to improve your owner's equity
In order to increase your owner's equity, you'll need an increase in revenue or increased gains. Here are several things to consider when trying to improve your owner's equity:
Lower your liabilities.
Make upgrades and renovations.
Maintain your property.
Pay off your debt.
Reduce manufacturing costs.
Increase your profit margin.
1. Lower your liabilities
To avoid depreciating your asset value, consider lowering your liabilities. This can be done in a number of ways, but one way is by replacing any loans you have with loans that have a lower interest rate. This will lower your debt and lower your liabilities.
2. Make upgrades and renovations
If you own a home and are hoping to improve your owner's equity, consider renovating your property. While you can't change your neighborhood, you can upgrade your property itself. Some examples include a new paint job or purchasing new appliances. While purchasing new appliances could potentially add to your debt, make sure that you'll turn a profit in the end. It's also important to keep in mind that interior design styles will change. Make sure to update your property in neutral tones like gray, beige and white that are appealing to a mass market. Light-colored walls, hardwood floors and neutral tones are timeless, clean, fresh and will help you increase your owner's equity.
3. Maintain your property
Taking care of your assets is important whether or not you're trying to lower your liabilities and improve owner's equity. You can maintain your property but doing routine inspections on the interior and exterior of the building, following all laws and doing routine landscaping. This should ensure your property is pleasing to the eye and will attract future investors or owners.
4. Pay off your debt
Paying off any accumulated debt will greatly help you lower any liabilities. You can do so by paying more than the minimum balance on any loans. For example, if you own a home, increase your mortgage payments and work on lowering your debt rather than accumulating it.
5. Reduce manufacturing costs
If you own a business, consider reducing manufacturing costs. This could mean using more economical products and machinery, streamlining operations, reducing the carrying cost of inventory or simply tracking your spending habits in relation to your business. Doing the latter will help you see where you can begin to spend less in order to reduce your overall liabilities.
6. Increase your profit margin
Similar to the previous tip, increasing your profit margin could be greatly beneficial in lowering your liabilities. If you own a business, you can increase product prices, pay your employees less, hire fewer employees or limit the amount of sales and discounts you offer to customers.
7. Be patient
Though you won't see an increase in your owner's equity right away, be patient in the process and wait for these various factors to turn in your financial favor.
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