Accounting Blog

Accounting Training, Tips, and News

Business equity measures the value of your company.

What Is Business Equity?

When you started your business, you may have invested your own money into your company. In fact, 77% of all small businesses rely on personal savings for initial funding, according to one study.

These initial funds are the beginning of building equity in your business. Business equity represents ownership in a company.

Equity is not just your initial investment. Once your business is up and running, equity also refers to the value of your business.

As a business owner, you have rights to all the items of value, or assets, within your company. You also take responsibility for all the liabilities of your company. You measure your equity with the relationship between your assets and liabilities.

Calculating business equity

You find your business’s equity by subtracting all your liabilities from all your assets. You can sum up equity into one fundamental accounting equation:

Equity = Assets – Liabilities

This equation shows you the value of your company. The higher the difference, the more your business is worth.

For example, you may have assets worth $15,000 and liabilities of $11,000. This results in equity of $4,000 for your business.

You report equity on the balance sheet.

Owners and business equity

Equity represents ownership in a business, so the number of owners your company has can affect your business equity.

If you are a single owner, you assume total ownership of your business. If you share ownership, you split equity depending on how much each person invested and how much of the business each person owns.

Note that the examples shown below are done with an accrual accounting method, which uses double-entry bookkeeping. For a simpler way to find equity, you could use cash-basis accounting. A basic accounting software can help you calculate figures.

Balance sheet: Single owner

If you are the only owner of your business, you assume all equity. As a single owner, your balance sheet should look something like the one below.

Assets Amount Liabilities & Equity Amount
 Cash  $10,000  Accounts Payable  $11,000
 Accounts Receivable  $5,000
 Total Assets  $15,000  Total Liabilities  $11,000
 Owner’s Equity  $4,000
 Total Equity  $4,000
 Total  $15,000  Total  $15,000

Balance sheet: Three owners

There could be multiple owners of a business who each invest money. When this occurs, the equity section of the balance sheet looks different than a single owner’s, but the results are the same.

Equity in multiple-owner businesses can change when an owner withdraws money from the business or pays dividends to shareholders. A balance sheet for a business with several owners might look something like the one below.

Assets Amount Liabilities & Equity Amount
 Cash  $10,000  Accounts Payable  $11,000
 Accounts Receivable  $5,000
 Total Assets  $15,000  Total Liabilities  $11,000
 Owner’s Equity
 J. Smith  $500
 R. Wells  $1,500
 P. Brown  $2,000
 Total Equity  $4,000
 Total  $15,000  Total  $15,000

In both balance sheets shown above, the business equity is $4,000. But, when three owners invest money, they each can have a line in the equity section of the balance sheet. It is important to individually track the owners’ equity for income tax purposes.

Equity as it changes

The dollar amount of available equity changes in the course of business. When you incur more liability, your equity decreases. When gain more assets, your equity increases.

When the total equity is a positive number, you have more assets than liabilities. This means your business is gaining value. Sometimes equity can be a negative number. When this happens, you have more liabilities are than assets and you’re usually losing value.

Do you need an easy way to record your income and expenses? Try our small business accounting software for free today. We offer free setup and support!

Comments are closed.