The financial accounting term owner's equity is used to describe the resources that are owned by the common and preferred stock shareholders of a company. Owner's equity is reported on a company's balance sheet.
Owner's Equity = Assets - Liabilities
Also known as shareholders equity and the net worth of a company, owner's equity is considered a "residual" claim against the assets of a company since the claims of creditors must be satisfied before those of the owners. Increases in owner's equity can come from two sources:
- Initial, and any additional, investments or purchases of common and preferred stock by the owners of the company
- Excess earnings (retained earnings) resulting from the profitable operation of the company
The subsections appearing in the owner's equity portion of the balance sheet include:
- Preferred Stock: holders are entitled to the payment of dividends before common stockholders, but normally have no voting rights.
- Common Stock: equity owners in a company, entitled to dividends as well as voting rights.
- Retained Earnings: includes those profits not paid out as dividends.
- Treasury Stock: stock reacquired by the corporation, which can be resold or retired.
Owner's equity is one of the three major divisions of the balance sheet, the other sections being liabilities and assets.
The table below illustrates the format for the owner's equity section of the balance sheet.