What is Equity in Business?

Equity and the accounting equation
What equity is called in each type of business

Equity is the owners' stake in a business: what's left of its assets after its liabilities are subtracted. It rises when owners put money in and when the business makes a profit, and it falls when owners take money out and when the business makes a loss. On the balance sheet, assets equal liabilities plus equity.

Billed publishes this page. The definitions below come from the open textbook Principles of Accounting, Volume 1: Financial Accounting (OpenStax), sections 2.2, 2.3, 3.1 and 3.2, all opened on October 29, 2026. This is general information, not accounting or tax advice; ask your accountant where judgment is needed.

Equity and the accounting equation

The accounting equation is Assets = Liabilities + Equity, so equity is assets minus liabilities. OpenStax says the equation "shows what the organization owns and the sources of (or claims against) those resources": the assets were paid for either by borrowing (liabilities) or by the owners (equity).

OpenStax also notes that equity "can also be referred to as net worth". Equity can be negative: if a business owes more than its assets are worth, liabilities exceed assets and equity is below zero.

What equity is called in each type of business

OpenStax: "The concept of equity does not change depending on the legal structure of the business (sole proprietorship, partnership, and corporation). The terminology does, however, change slightly based on the type of entity."

Money owners put in: "investments by owners are considered “capital” transactions for sole proprietorships and partnerships but are considered “common stock” transactions for corporations."
Money owners take out: "distributions to owners are considered “drawing” transactions for sole proprietorships and partnerships but are considered “dividend” transactions for corporations."
Profit kept in a corporation: "Beginning at the inception of a corporation, income that has not been distributed as dividends accumulates to form retained earnings. Net losses decrease retained earnings."

For a corporation, OpenStax splits stockholders' equity into two parts: "These two components are contributed capital and retained earnings." It adds that "retained earnings are not classified as assets", so retained earnings aren't cash in the bank. See how retained earnings are calculated.

What increases and decreases equity

OpenStax sums it up: "organizations become more valuable when owners make investments in the business and the businesses earn a profit (net income), and organizations become less valuable when owners receive distributions (dividends) from the organization and the businesses incur a loss (net loss)."

Increases: owner contributions (capital or stock) and net income.
Decreases: owner draws or dividends, and net losses.
No effect: borrowing or repaying a loan's principal. Both change assets and liabilities by the same amount, so equity doesn't move.

The equity roll-forward

OpenStax gives the change in owner's equity for a period as beginning balance, plus investments by owners, plus net income (or minus net loss), minus distributions. The statement of owner's equity "shows how the net worth/value (or equity) of business changed for the period of time", and "The ending balance is carried forward to the balance sheet."

Worked example: a year of owner's equity

The business and figures here are a sample, invented for this example.

A sole proprietor starts a print shop.

Opening position: the owner puts in $20,000 of cash, and the business borrows $10,000.
- Assets: cash $30,000.
- Liabilities: loan $10,000.
- Equity: $30,000 − $10,000 = $20,000.
During the year:
- net income: $40,000;
- owner's draws: $15,000;
- an extra owner contribution: $5,000;
- loan principal repaid: $2,000.
Equity roll-forward: $20,000 + $5,000 + $40,000 − $15,000 = $50,000. The $2,000 loan repayment isn't in the roll-forward, because it lowers cash and the loan by the same amount.
Check against the year-end balance sheet:
- Assets: cash $21,000 + accounts receivable $12,000 + equipment $35,000 = $68,000.
- Liabilities: loan $10,000 − $2,000 = $8,000, plus accounts payable $10,000 = $18,000.
- Equity: $68,000 − $18,000 = $50,000, which matches the roll-forward.
What it shows: equity grew by $30,000, but the business's cash fell from $30,000 to $21,000. Equity measures the owner's stake, not the cash on hand.

Equity is not cash or market value

Not cash: in the example, equity rose while cash fell, because profit went into receivables and equipment. Read equity alongside cash flow.
Not market value: equity on the balance sheet comes from recorded amounts, not from what a buyer would pay for the business. Ask your accountant or a valuation professional if you need a sale value.

For how equity compares with debt, see the debt-to-equity ratio and financial ratio analysis.

Keeping equity accurate

Record owner money as owner money. Contributions and draws go to equity accounts, not to revenue or expenses. Set them up in your chart of accounts.
Keep business and personal spending separate, so personal costs don't reduce the business's profit and equity.
Reconcile the roll-forward at year end: beginning equity plus contributions plus net income minus draws should equal the ending equity on the balance sheet.
Ask your accountant when you add partners, change your business structure or correct a prior year.

Where Billed fits

Billed publishes this page. Its expense tracking page says an expense in Billed records "who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry", and its financial reporting page describes an "Income vs Expense report" to "See how profitable your business is". Your invoices from Billed's invoice software and these expense records show income and expenses for a period. The equity roll-forward itself is done in your books, yourself or with your accountant.

When this guide isn't for you

This page covers equity for sole proprietors and small businesses. If you have partners with different capital accounts, issue shares or options, or change your business structure, work with an accountant on how equity is recorded.

Frequently Asked Questions

How do you calculate equity?

Subtract total liabilities from total assets. For example, assets of $68,000 and liabilities of $18,000 give equity of $50,000.

What is the difference between equity and retained earnings?

Retained earnings are one part of equity. OpenStax describes a corporation's equity as two components, contributed capital and retained earnings: what owners put in, and the profit kept in the business after dividends.

Can equity be negative?

Yes. If a business's liabilities are larger than its assets, equity is below zero. That can happen after losses or after owners take out more than the business has earned and they have put in.

Do owner's draws reduce equity?

Yes. OpenStax treats distributions to owners, called drawings in sole proprietorships and partnerships and dividends in corporations, as decreases in equity.

Is equity the same as cash?

No. Equity is assets minus liabilities, and the assets can be receivables, equipment or inventory as well as cash. A business can have growing equity and falling cash at the same time.

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What Is Equity in Business? A Simple Guide for Small Business