Owner’s Equity Formula

Owner’s Equity Formula (Table of Contents)

• Owner’s Equity Formula
• Examples of Owner’s Equity Formula (With Excel Template)
• Owner’s Equity Formula Calculator

Owner’s Equity Formula

Starting a new business will require the investment of funds that are raised by the business owners. These funds will be required to invest in the business assets and these kinds of funds can either be invested by the owners through borrowing externally or through their own sources. This is the proportion of assets that will be financed by the business owners.

Owner’s Equity is an owner’s share or the ownership in the business which is the amount of the business assets that are owned by the owners of the business. In different words, it depicts the amount the owner of the business has invested in the business less than the money the owner has taken out as withdrawal.

Below is the Owner’s Equity formula:

Examples of Owner’s Equity Formula (With Excel Template)

Let’s take an example to understand the calculation of Owner’s Equity formula in a better manner.

Example #1

The following data is related to Beta Company:

Investment in Gamma Company at fair value (Original Cost Rs 125,000): Rs 155,000 which is classified as Investment Available for sale.

You need to calculate the owner’s equity for Beta Inc.

Solution:

This is a straight forward calculation since we are given all the components of equity but let’s try to calculate from the formula.

Note: Investment unrealized gain is already included in other comprehensive income and hence it is not taken into consideration.

Owner’s Equity = Assets – Liabilities = Nil – Nil (since we are not given the data)

Owner’s Equity is calculated as:

• Owner’s Equity = 5,60,000 + 1,72,000 + 2,70,000 + 56,000
• Owner’s Equity = 10,58,000

Owner’s equity is 10,58,000

Example #2

Below is the balance sheet report of FB which is extracted from its annual report.

You need to calculate the owner’s equity.

Solution:

Owner’s Equity is calculated using the formula given below

Owner’s Equity = Assets – Liabilities

• Owner’s Equity = 8,45,24,000 – 1,01,77,000
• Owner’s Equity = 7,43,47,000

Owner’s equity is 7,43,47,000

Example #3

Below is the balance sheet report of AAPL Inc. which is extracted from its annual report.

You need to calculate the owner’s equity.

Solution:

Owner’s Equity is calculated using the formula given below

Owner’s Equity = Assets – Liabilities

• Owner’s Equity = 36,57,25,000 + 25,85,78,000
• Owner’s Equity = 10,71,47,000

Owner’s equity is 10,71,47,000

Explanation

The first part of equation is assets which states that all of the investments which are done by the corporation in building and making assets will sum up which includes plant & machinery, building, stock, cash, investments etc. and the second part of the formula is liabilities which depicts how much the organization has taken to support its assets which include the long term loans, payables, creditors etc. When one does addition of liabilities it won’t tie with assets total as there would remain balance which is owner’s equity which is brought by the owner in the business.

Relevance and Uses of Owner’s Equity Formula

Owner’s equity formula tries to depict the changes in the capital account due to contributions made which is inflow for the business, by the business owners during the accounting year, and also further any withdrawals made by the business owners and the income which is retained in the business or any losses which are suffered by the business during the accounting year.

This is basically a measure or a barometer to assess how much an entity’s or the company’s net assets will be belonging to its shareholders. It shows how an entity or the company will utilize its profit (i.e. basically retained earnings that are not distributed in the form of a dividend to its shareholders) and the capital that is invested by the business owners. A high shareholders equity on the annual statement which is the balance sheet will be an indication or a sign of what the business is mostly funded from its internal sources and there is less amount of external borrowing or debt.

Owner’s Equity Formula Calculator

You can use the following Owner’s Equity Calculator.

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