What is Owner’s Equity or Simply Equity

Here we will study about What is Owner’s Equity or Equity in Accounting.

Owner’s Equity is the right of owner or owners invested in the business. In case of Sole Proprietorship and Partnership Businesses, the term Owner’s Equity or Capital is used. while in case of Company, the term Equity is used.

The Natural or Normal or Favourable Balance for Owner’s Equity or Equity is Credit and negative or Unfavourable Balance is Debit. When Owner’s Equity increases, we Credit it and when it decreases, we Debit it.

Owner’s Equity is Calculated From Accounting Equation or Basic Accounting Equation or Fundamental Accounting Equation. The Accounting Equation Formula is show below:

Assets = Liabilities + Equity

From the above formula, we can get:

Equity = Assets - Liabilities

You may also be interested in “How To Calculate Stockholders Equity”

Example, Mr. A is the Sole Proprietor who invested in the business Rs. 500000 and started the business on January, 2018. This is the Business Transaction and the amount invested in the business is Capital or Owner’s Equity. There are two accounts involved in the Business Transaction. One is Cash and other one is Capital. Cash is an Asset and it is increasing by Rs. 500000, so we debit it while Capital is also increasing by Rs. 500000, so we credit it. If you don’t know how to Debit or Credit accounts then, you can read “Kinds of Accounts”.

We record the transaction in the Journal of Sole Owner’s Business as:

                                                  Cash a/c     

                                                                     Capital a/c 

(Business Started with Cash Rs. 500000)

You may also be interested in “What is the Difference Between Debit And Credit”

What is Statement of Changes In Owner's Equity

This Statement is prepared for Sole Proprietorship or Sole Owner Business and it shows the change in capital of a sole trader business during the current accounting period in which he may introduce fresh capital or withdraw some money for his personal use (Drawings). The final value is the closing Capital or Owner's Equity.

You Can Also Study, "What is Changes In Equity Format"

Owner’s Equity is also calculated from the following Owner's Equity Formula in case of Sole Proprietorship or Sole Owner Business:

Closing Capital / Owners’Equity = Opening Capital + Further Capital Introduced + Net Profit - Drawings

Is Owner's Equity An Asset?

No, as it is the right of the owners of the business and the business is liable to pay to the owners for the assets owned by it. According To Accounting Equation, the assets are always equal to Liabilities and Owner's Equity. so it is claimed of the owners against the assets of the business.

So, What Does Owner’s Equity Mean? Owner’e Equity or Equity is the amount invested in the business by the owner or owners of the business.