What Is Equity in Accounting?
The owner’s stake in the business, explained with a simple example.
Home › Accounting Glossary › Equity
| Also called | Owner’s equity, capital, shareholders’ equity (companies) |
|---|---|
| Normal balance | Credit |
| Topic | Financial accounting · Balance sheet |
Equity in plain English
Equity is what would be left for the owners if the business sold all its assets and paid every debt. It grows when owners invest more or when the business makes profit and keeps it. It shrinks with losses and with owner drawings or dividends.
Worked example
A business has assets of 80,000 and liabilities of 30,000. Its equity is 80,000 − 30,000 = 50,000. If it earns a profit of 10,000 and the owner takes no drawings, equity rises to 60,000.
- Confusing equity with cash. Equity is a claim on all assets, not a bank balance.
- Forgetting that profit increases equity and drawings decrease it.
Frequently asked questions
What is the difference between equity and capital?
Capital is the amount the owners put in. Equity also includes profits kept in the business, minus drawings.
What are retained earnings?
Profits a company keeps in the business instead of paying them out to shareholders.
Can equity be negative?
Yes. If liabilities exceed assets, equity is negative.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.