Definition of Owners Equity Examples
Owner’s Equity can be defined as a portion of a company’s net assets which can be claimed by the shareholders/ owners of the business as a part of their capital holding, i.e. sum-total of assets available for distribution to the owners of the entity after settlement of all outside liabilities and claims. In this topic, we will see different examples of owners equity.
Explanation
Owners equity can be said as the difference of assets and liabilities. This is also known as shareholders fund or net assets. It denotes the portion of the company’s net asset which can be claimed by its shareholders. In simple words, the amount invested by the owner in the business added with the company’s net earnings and reduced by capital already withdrawn by them and outside liabilities.
Some examples are as follows –
- Common Stock: This is the initial amount of capital invested by shareholder/ owners of an entity in the form of cash/ property or in any other form. It is a security that represents the ownership of a company. Common stockholders vote for the corporate policies and elect the board of directors. This equity ownership yields higher returns in the long term. These holders of common stock have rights to assets at the time of liquidation once the preference shares holders, bondholders and other debts are paid off. These are reported on the stockholder’s equity section of the balance sheet. Common stock is riskier than preference shares and bonds. Common stock signifies ownership in the company.
- Prefered Stock: These securities also represent ownership of the business and have a preferred claim over common stock on the earning and assets of the business. Preference shares have preference over common shares in terms of dividends payments, asset distribution at the time of liquidation etc. These shares may have a fixed dividend payment term that the company must obligate monthly, quarterly annually. The dividends here can be fixed or can be set in terms of benchmark interest rates. Preferred stockholders have limited rights as compared to common stockholders and cannot vote.
- Paid-in Capital in Excess of Par Value: Common stock is generally issued at a price higher than its par value. This excess amount represents a share premium. Par value is the amount printed on the share certificate, which is very low and is the legal amount; the amount paid by the investor is usually more than the par value and is classified as capital in excess of par. The excess amount than par value is recorded in the paid-in capital in excess of the par value account. This amount also forms part of the owner’s equity as this represents funds directly introduced by shareholders of a company.
- Retained Earnings: Retained earnings can be defined as a portion of net profits which are retained in business after the distribution of dividends to its shareholders. Companies earning handsome profits will give greater room for management to pay dividends and reinvest the balance money into the business for future growth. The decision of retaining earnings or distributing it to shareholders is solely at the discretion of the management, which may further require shareholders consent.
- Other Comprehensive Income: It is the result of changes in accounts of unrealized gains and losses on investments and on account of transactions like foreign currency trade.
Examples of Owners Equity
Following are the example are given below:
Example #1
Flamingo Inc. has incorporated a business one year back, and by the end of the financial year ending in 2019, the company had a building of $30,000, land of $60,000, inventory of $10,000, Equipment of $20,000, accounts receivable of $8,000 representing credit sales during the year and bank balance of $20,000. Also, the company had a loan amounting to $30,000 from the bank, creditors worth of $10,000 representing credit purchases made during the financial year. Determine owner’s equity.
Solution
As we had discussed, owner’s equity can be calculated as a sum total of all assets reduced by its external liabilities, i.e. –
|
Particulars |
Amount ($) |
| Assets | |
| Building | 30,000 |
| Land | 60,000 |
| Inventory | 10,000 |
| Equipment | 20,000 |
| Accounts Receivable | 8,000 |
| Bank | 20,000 |
| Liabilities | |
| Loan | 30,000 |
| Creditors | 10,000 |
Assets are calculated as
- Assets = $30,000 + $60,000 + $10,000 + $20,000 + $8,000 + $20,000
- Assets = $1,48,000
Liabilities is calculated as
- Liabilities = $30,000 + $10,000
- Liabilities = $40,000
Hence,
Owners Equity is calculated as
Owner’s Equity = Total Assets – Total Liabilities
- Owners Equity = $1,48,000 – $40,000
- Owners Equity = $1,08,000
Example #2
Ascertain owner’s equity from below mentioned details: –
|
Particular |
Amount ($) |
| Common Stock | 9,00,000 |
| Retained Earnings | 4,60,000 |
| Prefered Stock | 3,30,000 |
| 12% Non-Convertible Debentures |
1,00,000 |
Solution:
Owner’s equity can consist of various components like share capital, reserves and surplus, and therefore, here, owner’s equity will be calculated as follows: –
Owners Equity is calculated.
Owners Equity = Common Stock +Prefered Stock + Retained Earnings
- Owners Equity = $9,00,000 + $3,30,000 + $4,60,000
- Owners Equity = $16,90,000
Note- Debentures will not form part of owner’s equity as it forms part of external liabilities.
Example #3
From the following, mentioned details ascertain Purple Inc. owner’s equity as of 31st December 2019
| Sr. No. | Particulars | Amount |
| 1. | Opening Common Stock capital as on 01/01/2019 | $10,00,000 |
| 2. | Equity shares issued on 1st June 2020 | 1,000 shares of 100 par value at 120 per share |
| 3. | Stock dividend processed | 1 share against 1 share |
| 4. | Debentures issued | $10,00,000 |
Solution:
The example here requires us to calculate owner’s equity where certain capital transactions are mentioned. Let us analyse all one by one and calculate owner’s equity as of 31 Dec 2019
| Sr. No. | Particulars | Add/Less/No effect | Amount ($) | Remarks |
| 1. | Opening capital | Add | 10,00,000 | This is direct capital invested by owners during a previous accounting period. |
| 2. | Fresh capital issued | Add | 1,20,000 | Share issued will increase owners equity by 1,00,000 (1,000 x 100) and issued capital over par by $20,000 (1,000 x 20) |
| 3. | Stock dividend | No effect | – | This does not affect shareholders value as there is an increase of capital with a simultaneous decrease in retained earnings balance. |
| 4. | Debentures Issued | No effect | – | As this forms part of the external claim, it will not be added to the owner’s equity calculation. |
Therefore, Owner’s equity as on 31st December2019 will be $10,00,000 + $1,20,000 i.e. $11,20,000.
Example #4
The balance sheet of Viacom Inc. represents the values pertaining to the year ended in 2019. The company owners want to know the value of the owner’s equity.
All the figures in Million dollar.
| Particulars | Amount |
| Assets | |
| Land and Building | 4,000 |
| Plant and Machinery | 2,000 |
| Inventory | 1,600 |
| Accounts Receivables | 1,600 |
| Liability | |
| Bank Loan | 1,400 |
| Creditors | 1,200 |
| Misc Liabilities | 1,000 |
Solution:
Assets is calculated as
- Assets = $4,000 + $2,000 + $1,600 + $1,600
- Assets = $9,200
Liabilities is calculated as
- Liabilities = $1,400 + $1,200 + $1,000
- Liabilities = $3,600
Hence,
Owners Equity is calculated as
Owners Equity = Assets – Liabilities
- Owners Equity = $9,200 – $3,600
- Owners Equity = $5,600
Conclusion
Owner’s equity represents a synonym of shareholders fund or owner’s capital. It represents net assets available for distribution to shareholders after the settlement of all external claims. It can be calculated as a difference between total assets and total liabilities. The owner’s equity component includes share capital, retained earnings, reserves and surplus etc. This is also known as residual owner’s fund as it represents the value of money due to its residual owners after the settlement of all external liabilities in the form of invested funds.
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