Equity
Equity is the owner's claim on business assets after all liabilities are subtracted. In simple terms, it's what the business is worth to its owners—total assets minus total debts. You'll also hear it called owner's equity, stockholders' equity, or net worth depending on the business structure.
Equity Definition
Equity is the owner's claim on business assets after all liabilities are subtracted. In simple terms, it's what the business is worth to its owners—total assets minus total debts. You'll also hear it called owner's equity, stockholders' equity, or net worth depending on the business structure.
Equity in Practice — Example
A freelance photographer owns $40,000 in camera equipment, a $10,000 business vehicle, and has $8,000 in her business bank account—totaling $58,000 in assets. She owes $12,000 on the vehicle loan and $3,000 on a credit card. Her equity is $58,000 minus $15,000, which equals $43,000. That $43,000 represents her ownership stake in the business.
Why Equity Matters for Your Books
Equity is one of the three pillars of the accounting equation: Assets = Liabilities + Equity. Every transaction in your books ultimately affects this equation. When you earn revenue, equity goes up. When you take an owner's draw or the business incurs a loss, equity goes down.
Tracking equity matters because it tells you whether your business is building real value or slowly eroding. A business can be profitable on paper but have declining equity if the owner is drawing out more than the business earns. Lenders and investors also look at equity to assess financial health.
For sole proprietors and LLCs, equity is straightforward—it's your capital contributions plus retained earnings minus draws. For corporations, it gets more complex with common stock, additional paid-in capital, and retained earnings all rolling into stockholders' equity.
How Equity Shows Up in QuickBooks
In QuickBooks Online, equity appears in the Chart of Accounts under the Equity account type. Common equity accounts include Owner's Equity, Owner's Draws, Retained Earnings, and Opening Balance Equity. You can see your total equity on the Balance Sheet report (Reports → Balance Sheet). QBO automatically calculates retained earnings by rolling net income from the Profit & Loss into equity at year-end.
Common Mistakes
FAQ
Q: Is equity the same as cash in the bank?
A: No. Equity is a calculated figure (assets minus liabilities). You could have high equity but low cash if most of your assets are tied up in equipment or inventory.
Q: Does equity show up on the Profit & Loss statement?
A: No. Equity lives on the Balance Sheet. However, net income from the P&L flows into retained earnings, which is part of equity.
Related Terms
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