What Is Owner’s Equity? A Bookkeeper Explains

Let’s talk about something that sounds like it belongs in a dusty accounting textbook but is actually one of the most important numbers in your business: Owner’s Equity. 

Now, before your eyes glaze over, let me break this down. Think of your business as a pie: Owner’s equity is the slice of the pie that’s yours—what’s left after everyone else takes their piece. 

So... What Exactly Is It? 

In its simplest form, owner’s equity is what you actually own in your business. 

Here’s the formula: 

Assets – Liabilities = Owner’s Equity 

Let’s say your business owns $100,000 in equipment, cash, and inventory. But you owe $40,000 in loans, unpaid bills, or maybe that equipment lease you kind of forgot about. What’s left? Yep, $60,000. That’s your equity. That’s what the business is worth to you. 

Sounds straightforward, right? Well… yes and no. 

Equity Isn’t Just a Number—It’s a Story 

Here’s the twist: owner’s equity is a living, breathing number. It shifts. It morphs. It reacts to how you treat your business. 

• Invest more of your own money? Equity goes up. 

• Take out a fat loan for a new van? Equity drops (until that van starts making money). 

• Take a little too much for “owner draws” (those sneaky personal withdrawals)? Yep—equity drops again. 

So, it’s not just a tally. It’s a reflection of how well your business is being managed. A kind of pulse check, if you will. 

Why Should You Care? 

Imagine selling your business one day—or needing a loan, or taking on a partner. They’ll all want to know: how much of this business actually belongs to you? That’s equity talking. 

• Banks analyze your equity to decide if you’re a good risk. 

• Investors ask about it to gauge your financial backbone. 

You should care because it’s your skin in the game. 

A Quick Real-World Snapshot 

Let’s say: 

• You started your business with $10,000. 

• You’ve made $50,000 in profit. 

• You’ve taken out $20,000 for personal use. 

• Your equity? $40,000. 

Why? Because you’ve grown your business, but you’ve also taken some of that growth home with you. Totally fine—just know it all ties back into that equity line. 

To wrap up, owner’s equity isn’t just accounting jargon—it’s a mirror. It shows the financial truth of your business, stripped of the fluff. Whether it’s growing, shrinking, or staying flat, it tells a story. Your story. 

So, next time you glance at your balance sheet, don’t skip past that little equity line at the bottom. It might just be the most honest line on the page. 

Need help figuring out what your equity says about your business? I’m just a spreadsheet away. 

This information should never be taken as advice. Please talk to your bookkeeping and tax business professionals to discuss your individual situation. By the way, we’d love to partner with you on that! Give us a call or schedule your no-obligation consultation today, click here to book a call.