Your Business and Equity

​The term equity means value or worth.  For instance, consider the value of a property and how much is owed on the loan. What is left over is your equity.  Equity can also mean ownership. 

Your Business and Equity
By Pierre Mouchette | Real Property Experts LLC

Your Business and Equity
By Pierre Mouchette | Real Property Experts LLC
 
What Does Equity Mean? 
The term equity means value or worth.  For instance, consider the value of a property and how much is owed on the loan. What is left over is your equity.  Equity can also mean ownership. 
 
What is Owner's Equity? 
Owners’ Equity is an owner's ownership (equity) in the business, or the amount of the business assets owned by the business owners.  Another way to look at this concept is to say that owner's equity in a business is the amount the owner has invested in the business minus any money the owner has taken out of the business in the form of a draw, not as salary. 
You can find the amount of owner's equity in a business by looking at the balance sheet.  On the left are assets (the value of what the business owns).  On the right at the top are liabilities (what's owed by the business) and owner's equity (what's left over).
 
Equity Interest
An equity interest is an ownership interest in a business entity.  Shareholders have equity interest (their purchase of shares of stock gives them a share of the ownership of the business).  Equity interest contrasts with creditor interest from loans made by creditors to the business.
 
How Does Owner's Equity Get Into, And Out of a Business? 
Owner's equity is increased by - increases in owner capital contributions or increases in profits of the business.  This is oversimplified, but basically the only way an owner's equity/ownership can grow is by investing more money in the business, or by increasing profits through increased sales and decreased expenses.  If a business owner withdraws money from owners’ equity, the withdrawal is considered a capital gain and the owner must pay capital gains tax on the withdrawal.
 
Business Ownership - Capital Accounts
Each owner of a business has a separate account (called a capital account) showing his or her ownership in the business.  The value of all the capital accounts of all the owners is the total owner's equity in the business. 
 
How is Owner's Equity Shown on a Business Balance Sheet?
Owner's equity changes over time, and it is shown at the end of an accounting period (month, quarter, or year) on the business balance sheet.  On the balance sheet, owner's equity is shown as a net amount at that specific moment in time.
The net amount is because the owner has contributed to the business but he or she has also taken money out of the business. 
Owner's equity is expressed differently in each type of business

• In a sole proprietorship or partnership, it is expressed as the owner's or partner's capital account on the balance sheet. 

In a corporation, it is expressed as retained earnings, which is basically owner's equity kept in the business to be used for business growth.