The balance sheet also indicates that Jake owes the bank $500,000, creditors $800,000 and the wages and salaries stand at $800,000. Jake’s balance sheet for the previous year shows that the warehouse premises are valued at $1 million, the factory equipment is valued at $1 million, inventory is valued at $800,000 and that debtors owe the business $400,000. Let’s assume that Jake owns and runs a computer assembly plant in Hawaii and he wants to know his equity in the business.
Owner’s equity can be calculated by summing all the business assets ( property, plant and equipment, inventory, retained earnings, and capital goods) and deducting all the liabilities (debts, wages, and salaries, loans, creditors). For example: If a real estate project is valued at $500,000 and the loan amount due is $400,000, the amount of owner’s equity, in this case, is $100,000. In simple terms, owner’s equity is defined as the amount of money invested by the owner in the business minus any money taken out by the owner of the business. The only difference between owner’s equity and shareholder’s equity is whether the business is tightly held (Owner’s) or widely held (Shareholder’s). The liabilities represent the amount owed by the owner to lenders, creditors, investors, and other individuals or institutions who contributed to the purchase of the asset.
It is calculated by deducting all liabilities from the total value of an asset ( Equity = Assets – Liabilities).
Owner’s Equity is defined as the proportion of the total value of a company’s assets that can be claimed by its owners (sole proprietorship or partnership) and by its shareholders (if it is a corporation).
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