Owner's Equity

So let's talk about one of the business world's most overlooked, underrated, and misunderstood components of company finances, Owner's Equity. What is it, what does it mean, and why is it so crucial for your business and your bookkeeper?  

The owner's equity is left over after all the company's liabilities have been taken care of. These liabilities include (but are not limited to) payroll, loans, rent, healthcare, and invoices. If all of the liabilities have either been paid off or taken care of via projected future earnings, anything else left over is… yes, you've guessed it, Owner's Equity. The simplest way to look at this is as follows - Assets – Liabilities = Owner's Equity. 

The term Owner's Equity is most commonly used with Sole Proprietorship. Still, it can also be used for LLCs and is known as Shareholder Equity or Stockholders Equity, depending on the ownership structure.  

So what is complied together to make up Owner's Equity?  

1. Money that has been invested in the company by the owner(s). 
2. Plus any profits made by the business since the business started.  
3. Minus money taken out of the business by the owner(s).  
4. Minus money owed by the business

This formula looks a little different for LLCs and is primarily worked out by calculating stocks, earnings, and paid-in capital.   

So why is the all-mighty concept of Owner Equity so often overlooked and misunderstood? Well, it mainly comes down to the fact that Owner's Equity doesn't appear as an asset on the company's balance sheet. Wait, what? Yes, you read that correctly. Owner's equity is an asset of the business owner(s), not the business as a stand-alone entity. As far as the company itself is concerned, the owner's equity is a liability for the business. If the business was sold and all of its external liabilities were paid off, the remainder would be the Owner's Equity.  

Every business is different, as are the details and structure, so the details of your ownership equity are equally unique. That is where the experts at ShoreSource Business Solutions come in.  At ShoreSource, we understand the ins & out of bookkeeping and can help guide you through the sometimes murky waters of things like Owner's Equity. We know the hows, whys & wheres of your finances and work with you to help achieve the success you've already worked so hard for.  

Are you interested in learning more about ShoreSource Business Solutions, LLC?   
Feel free to reach us at 843.729.2961 or info@shoresourcebiz.com.