The owners' claim on the business: assets minus liabilities.
Owner's equity is the owners' stake in the business — what would be left if the assets were used to pay off every liability. It's the third term of the accounting equation: assets = liabilities + equity.
Equity moves four ways: up with owner contributions and profits, down with owner draws (or distributions) and losses. Its components typically include contributed money, retained earnings, and the current year's result. Negative equity — liabilities exceeding assets — is a serious flag worth understanding, not ignoring.
A business holds $50,000 of assets against $30,000 of liabilities: equity is $20,000. If next year adds $15,000 profit and the owner draws $10,000, equity ends at $25,000.
Retained Earnings · Owner's Draw · Balance Sheet — or browse the full plain-English glossary.
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