What is owner’s equity?

Owner’s equity represents the residual interest in the assets of a company after all liabilities have been deducted. This means that it is essentially what is left for the owners once all debts and obligations have been settled. It is an important measure of the financial health of a business, as it indicates the value that shareholders have in the company.

When you evaluate a company's balance sheet, owner’s equity is calculated using the formula: Total Assets minus Total Liabilities. This reflects how much of the company is owned outright by the shareholders. In essence, owner’s equity can include retained earnings, additional paid-in capital, and common stock, all of which contribute to the overall financial stake that owners maintain in the enterprise.

This understanding is critical for analyzing a company’s financial situation, as increases in owner’s equity suggest that the company is generating profits or has received additional investments, whereas decreases may indicate losses or withdrawals by owners.