What is equity?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Equity is the value of the owners' interest in a business, worked out by taking its total liabilities away from its total assets. It grows with capital contributions and retained profits, and shrinks with losses and distributions to owners. An owner's loan to a company is a liability, not equity. It is also called owner's equity or net assets.
The balance sheet rests on one equation: assets equal liabilities plus equity. Because equity is whatever is left over, it moves whenever the business makes a profit or a loss, or the owners contribute capital or receive distributions. Under double-entry bookkeeping an equity account increases with a credit, the same side as a liability.
A sole trader or partnership usually keeps a capital account for each owner, with a drawings account for money taken out during the year. Drawings reduce the owner's equity rather than the business's profit. A company records what its shareholders paid for their shares separately from the profits it has kept.
Equity is a figure in the books, not money in the bank. A business can show healthy equity and still be short of cash, because its value may be tied up in equipment, stock or unpaid invoices.
In Australia
business.gov.au defines equity as the value of ownership interest in a business, calculated by deducting liabilities from assets. Its glossary treats owner's equity, shareholder's equity, net worth and net assets as names for the same figure, total assets minus total liabilities, and its balance sheet template ends with that calculation.
The same glossary defines drawings as personal expenses paid for from a business account.
Worked example
| Item | Amount (AUD) |
|---|---|
| Equity at the start of the year | 20,000.00 |
| Add: capital the owner contributed | 5,000.00 |
| Add: net profit for the year | 18,400.00 |
| Less: drawings | 12,000.00 |
| Equity at the end of the year | 31,400.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Recording a sole trader's or partner's personal spending from the business account as a business expense instead of as drawings.
- Putting the owner's savings into the business bank account without recording whether the deposit is a capital contribution or, where applicable, a loan. Ask your accountant which account fits the arrangement.
- Treating the equity figure as cash the business could pay out today.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Set up a balance sheet
business.gov.au, Australian Government. Current at 15 October 2026, released 18 January 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.