How is owner equity calculated?

Owner equity, also known as shareholders' equity or net worth, is calculated by subtracting liabilities from assets. This formula reflects the financial position of the owner in a business, representing what remains after all debts have been settled. When you take the total assets of a business—such as cash, inventory, and property—and subtract the total liabilities—such as loans and obligations—you arrive at the owner's equity. This value indicates how much of the business's resources are funded by the owner's investments as opposed to debt. Understanding this calculation is crucial for assessing the financial health and stability of a business.

The other potential calculations do not accurately represent owner equity. For instance, adding assets and liabilities would misrepresent the financial standing, as it does not consider the debts that must be settled. Conversely, liabilities minus assets would yield a negative value if liabilities exceed assets, which is not a useful measure of owner's equity or financial health. Lastly, dividing assets by liabilities gives a ratio that could indicate leverage but does not directly reflect ownership equity.