Updated July 14, 2023
Definition of Owners Equity Examples
Owner’s Equity can be defined as a portion of a company’s net assets that can be claimed by the shareholders/ owners of the business as a part of their capital holding, i.e. sum-total of assets available for distribution to the owners of the entity after settlement of all outside liabilities and claims. In this topic, we will see different examples of owners equity.
Explanation
Owners equity can be said as the difference between assets and liabilities. This is also known as shareholders fund or net assets. It denotes the portion of the company’s net asset that its shareholders can claim. Simply put, the amount invested by the owner in the business is added to the company’s net earnings and reduced by capital already withdrawn by them and outside liabilities.
Some examples are as follows –
- Common Stock: This is the initial amount of capital invested by shareholders/ owners of an entity in the form of cash/ property or any other form. It is a security that represents the ownership of a company. Common stockholders vote for the corporate policies and elect the board of directors. This equity ownership yields higher returns in the long term. These holders of common stock have rights to assets at the time of liquidation once the preference shares holders, bondholders, and other debts are paid off. These are reported on the stockholder’s equity section of the balance sheet. Common stock is riskier than preference shares and bonds. Common stock signifies ownership in the company.
- Preferred Stock: These securities also represent ownership of the business and have a preferred claim over common stock on the earning and assets of the business. Preference shares have preference over common shares in terms of dividends payments, asset distribution at the time of liquidation, etc. These shares may have a fixed dividend payment term that the company must obligate monthly, quarterly annually. Companies can fix the dividends or determine them based on benchmark interest rates in this context. Preferred stockholders have limited rights compared to common stockholders and cannot vote.
- Paid-in Capital in Excess of Par Value: Common stock is generally issued at a price higher than its par value. This excess amount represents a share premium. Par value is the amount printed on the share certificate, which is very low and is the legal amount; the amount paid by the investor is usually more than the par value and is classified as capital in excess of par. The excess amount than par value is recorded in the paid-in capital in excess of the par value account. This amount also forms part of the owner’s equity, representing funds directly introduced by company shareholders.
- Retained Earnings: Retained earnings are a portion of net profits retained in a business after distributing dividends to its shareholders. Companies earning handsome profits will allow management to pay dividends and reinvest the balance of money into the business for future growth. Retaining earnings or distributing it to shareholders is solely at the discretion of the management, which may further require the shareholder’s consent.
- Other Comprehensive Income: It results from changes in accounts of unrealized gains and losses on investments and transactions like foreign currency trade.
Examples of Owner’s Equity
Following are the example are given below:
Example #1
Flamingo Inc. incorporated a business one year back. By the end of the financial year ending in 2019, the company had a building of $30,000, land of $60,000, inventory of $10,000, Equipment of $20,000, accounts receivable of $8,000 representing credit sales during the year, and bank balance of $20,000. Also, the company had a loan amounting to $30,000 from the bank, creditors worth $10,000 representing credit purchases made during the financial year. Determine owner’s equity.
Solution
As we had discussed, owner’s equity can be calculated as a total of all assets reduced by its external liabilities, i.e. –
|
Particulars |
Amount ($) |
| Assets | |
| Building | 30,000 |
| Land | 60,000 |
| Inventory | 10,000 |
| Equipment | 20,000 |
| Accounts Receivable | 8,000 |
| Bank | 20,000 |
| Liabilities | |
| Loan | 30,000 |
| Creditors | 10,000 |
Assets are calculated as
- Assets = $30,000 + $60,000 + $10,000 + $20,000 + $8,000 + $20,000
- Assets = $1,48,000
Liabilities are calculated as
- Liabilities = $30,000 + $10,000
- Liabilities = $40,000
Hence,
Owners Equity is calculated as
- Owners Equity = $1,48,000 – $40,000
- Owners Equity = $1,08,000
Example #2
Ascertain owner’s equity from the below-mentioned details: –
|
Particular |
Amount ($) |
| Common Stock | 9,00,000 |
| Retained Earnings | 4,60,000 |
| Prefered Stock | 3,30,000 |
| 12% Non-Convertible Debentures |
1,00,000 |
Solution:
Owner’s equity can consist of various components like share capital, reserves, and surplus, and therefore, here, owner’s equity will be calculated as follows: –
Owners Equity is calculated.
- Owners Equity = $9,00,000 + $3,30,000 + $4,60,000
- Owners Equity = $16,90,000
Note- Debentures will not form part of the owner’s equity as it forms part of external liabilities.
Example #3
From the following, mentioned details ascertain Purple Inc. owner’s equity as of 31st December 2019
| Sr. No. | Particulars | Amount |
| 1. | Opening Common Stock capital as on 01/01/2019 | $10,00,000 |
| 2. | Equity shares issued on 1st June 2020 | 1,000 shares of 100 par value at 120 per share |
| 3. | Stock dividend processed | 1 share against 1 share |
| 4. | Debentures issued | $10,00,000 |
Solution:
The example here requires us to calculate owner’s equity where certain capital transactions are mentioned. Let us analyze all one by one and calculate the owner’s equity as of 31 Dec 2019
| Sr. No. | Particulars | Add/Less/No effect | Amount ($) | Remarks |
| 1. | Opening capital | Add | 10,00,000 | This is direct capital invested by owners during a previous accounting period. |
| 2. | Fresh capital issued | Add | 1,20,000 | Share issued will increase owners equity by 1,00,000 (1,000 x 100) and issued capital over par by $20,000 (1,000 x 20) |
| 3. | Stock dividend | No effect | – | This does not affect shareholder’s value as there is an increase of capital with a simultaneous decrease in retained earnings balance. |
| 4. | Debentures Issued | No effect | – | As this forms part of the external claim, it will not be added to the owner’s equity calculation. |
Therefore, Owner’s equity as on 31st December2019 will be $10,00,000 + $1,20,000 i.e. $11,20,000.
Example #4
The balance sheet of Viacom Inc. represents the values pertaining to the year ended in 2019. The company owners want to know the value of the owner’s equity.
All the figures are in Million dollars.
| Particulars | Amount |
| Assets | |
| Land and Building | 4,000 |
| Plant and Machinery | 2,000 |
| Inventory | 1,600 |
| Accounts Receivables | 1,600 |
| Liability | |
| Bank Loan | 1,400 |
| Creditors | 1,200 |
| Misc Liabilities | 1,000 |
Solution:
Assets are calculated as
- Assets = $4,000 + $2,000 + $1,600 + $1,600
- Assets = $9,200
Liabilities are calculated as
- Liabilities = $1,400 + $1,200 + $1,000
- Liabilities = $3,600
Hence,
Owners Equity is calculated as
Owners Equity = Assets – Liabilities
- Owners Equity = $9,200 – $3,600
- Owners Equity = $5,600
Conclusion
Owner’s equity represents a synonym of shareholders fund or owner’s capital. It represents net assets available for distribution to shareholders after the settlement of all external claims. It can be calculated as a difference between total assets and total liabilities. The owner’s equity component includes share capital, retained earnings, reserves, surplus, etc. This is also known as residual owner’s fund as it represents the value of money due to its residual owners after settling all external liabilities in the form of invested funds.
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