Small business owners always enter their business full of enthusiasm, thinking that they have taken all the necessary steps to succeed. However, financial management quickly becomes a “nightmare” with all its challenging terms and ambiguities. Over time, and several transactions later, you’ve undoubtedly wondered – What is owner’s equity?
You have probably researched this topic, but have you understood it clearly? If you understood what it means, great, but if you didn’t, we’ll try to explain it more thoroughly:
To begin with, when you first invest money into your business, overtime that investment will grant you returns which will be added to your original funds unless it has been withdrawn from your business intentionally.
These returns may be in the form of profits or losses. Therefore, they will increase or decrease the original investment made into the business. If you have not withdrawn profit (dividend) from the business for personal use, the amount of money earned represents the total stake you hold in your business.
The owner’s equity is defined as a residual claim, not the primary claim in your business. The primary claim would go towards settling the debt of external creditors. Whatever remains left would be used to fix the owner’s equity, thus categorized as a residual claim.
Now let’s conclude the information covered.
Owner’s equity includes:
- Money invested by the owner of the business
- Plus profits of the business since its inception
- Minus money taken out of the business by the owner
- Minus money owed to others
If the business is structured as a corporation, equity may also include accounts like:
- Retained earnings
- Common stock
- Preferred stock
- Treasury stock
- Additional paid-in capital
We hope that we have managed to clarify the term ‘owner’s equity’ with this informative article. In any case that there is still ambiguity, CTC is there for you and offers you a free initial consultation. Our financial managers would love to assist you – We turn your accounting nightmares into a walk in the park!