Equity

What is equity?

Equity represents your ownership stake in your business. It's calculated as total assets minus total liabilities. If your business has $100,000 in assets and $40,000 in debts, your equity is $60,000—that's the portion of the business you truly own, free and clear.

For sole proprietors and small business owners, equity shows how much value you've built in your business over time.

What affects equity

Equity changes based on several factors:

• Profits — When you earn more than you spend, equity increases
• Losses — When expenses exceed income, equity decreases
• Owner investments — Money you put into the business increases equity
• Owner draws — Money you take out for personal use decreases equity

Equity on the balance sheet

Equity appears on your balance sheet as part of the fundamental accounting equation: Assets = Liabilities + Equity. Growing equity over time generally indicates a healthy, profitable business. Negative equity—where liabilities exceed assets—is a warning sign that the business owes more than it owns.