Owners' equity is the difference between assets and liabilities. The first thing you will need to do for the calculation is to add all of the assets. The second thing you will need to do is to add all of the liabilities. The third thing you will need to do is subtract the total amount of liabilites from the total assets. If the answer is a positibe number then owner's equity is positive and the owner has made or invested more money. If the answer is negative, that means that the owner is losing money and has more debts than assets.
If you have time and there are lots of accounts, it is always a good idea to add each set of numbers twice. It is very easy to hit a wrong button on a calculator. In public accounting we had to attach two adding machine tapes to almost all of our work papers to make sure we did not have simple addition or input errors.
The relation between assets, liabilities and owner’s equity is: Assets = Liabilities + Owner’s Equity.
So Owner’s equity= Assets – Liabilities.
It is therefore essential to calculate the assets and subtract the liabilities to arrive at the value of the owner’s equity.
An asset is defined as anything which has a value and which is owned by the owner. Assets include:
- Current assets: cash, inventory, raw material, account receivables
- Investments: stocks, bonds, property, etc.
- Capital assets: Land, buildings, equipment
- Intangible assets. Patents, copyrights and other non-material assets
- Current liabilities: short-term loans, accounts payable and any other liability that has to be paid within a year
- Long-term liabilities: long-term loans, mortgages, etc. which can be paid over a period that extends beyond one year
After calculating the assets and the liabilities, subtract the liabilities from the assets, what you are left with is the owner’s equity.
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