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.

It describes equity finance as money put into a business in return for a share of its ownership, whether it comes from the owners themselves, from friends and family or from outside investors. It also lists owner's equity as one of the account types in a chart of accounts, alongside assets, liabilities, income and expenses.

Worked example

Illustrative example: how a sole trader's equity changes over a year
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.
Recording a company's share capital and its retained profits in one account, so it is unclear how much shareholders paid in and how much the business earned and kept.
Leaving negative equity, where liabilities are larger than assets, unexamined instead of raising it with your accountant.

Common questions

What is the difference between equity and capital?

In bookkeeping, capital usually means what the owners have put into the business, recorded in a capital or share capital account. Equity is the whole of the owners' interest: that capital plus profits the business has kept, less losses and anything paid out or drawn. A business can start with modest capital and build larger equity through retained profits, or see equity fall below the capital put in after a run of losses.

What is the difference between equity and debt?

Debt is money the business has borrowed or otherwise owes, such as a bank loan, an unpaid supplier bill or a loan from an owner to their company, and it is recorded as a liability. It generally has to be repaid on the terms agreed, often with interest. Equity is the owners' stake in what is left after those debts, with no set repayment date; owners receive their share through profits paid out or drawn, in the way the business structure allows.

How do you calculate equity from a balance sheet?

Add up total assets, current and non-current, then total liabilities, current and long-term, and take the second total from the first. The equity section of the balance sheet should reach the same figure from the other direction: capital contributed, plus retained profits and this year's profit, less losses, distributions and drawings. If the two figures differ, the books do not balance, for example because an entry was recorded on one side only or a total was added up wrongly.

Related terms

Related service

Management and cash-flow reports

Monthly reports that show where the business stands.

More about management and cash-flow reports

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.