Owners’ equity

Definition

Owners' equity represents the residual interest in the assets of a corporation after deducting liabilities. It essentially reflects the net worth of the business attributable to its shareholders.

5 Must Know Facts For Your Next Test

1. Owners' equity is reported on the balance sheet and includes common stock, additional paid-in capital, and retained earnings.
2. It can be increased by issuing new shares or retaining earnings from profitable operations.
3. Owners' equity can decrease due to dividend payments, share buybacks, or net losses.
4. The accounting equation (Assets = Liabilities + Owners’ Equity) highlights its foundational role in financial statements.
5. Owners' equity differs from retained earnings as it encompasses all sources of equity, not just cumulative profits kept in the business.

Review Questions

• How does issuing new shares affect owners' equity?
• What components make up owners' equity on a balance sheet?
• In what ways can owners' equity decrease?

Related terms

Retained Earnings: The cumulative amount of net income that has been retained in the corporation rather than distributed to shareholders as dividends.

Common Stock: Represents ownership shares in a corporation and is part of owners’ equity.

Additional Paid-In Capital: The excess amount paid by investors over the par value of stock during an initial public offering or any subsequent stock issuance.