What is owner's equity?

Owner's equity represents the owner's residual interest in business assets after deducting liabilities, calculated as total assets minus total liabilities. For professional service firms, owner's equity reflects accumulated profits retained in the business plus capital contributions.

Key characteristics

• Assets minus liabilities

• Owner's stake in business

• Increases with profits

• Decreases with losses and distributions

• Balance sheet component

• Different from cash available

Why it matters for professional service firms

Owner's equity shows what the business is worth to owners on a book value basis. Growing equity indicates retained value; declining equity signals concern. Professional service firms should monitor equity growth as an indicator of financial health and value accumulation.

Real-world example

David's balance sheet showed assets of $285,000 liabilities of $95,000. Owner's equity: $190,000. Composition: initial contribution $50,000, retained earnings $140,000. Year-end profit of $80,000 added to equity; distributions of $65,000 reduced it. Net equity growth of $15,000 indicated a profitable year with some value retained in the business.