What is Equity?

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Equity, also known as capital or net worth, is the amount owners have invested in a business. In the equity section of your chart of accounts, you must do three things:

  • show the initial investment (Paid-in Capital, Owner's Contributions)
  • track withdrawals from this investment (Owner's Draw, Dividend Paid)
  • show the combined profit or loss of the business since inception (Retained Earnings)

Equity can also be thought of as the owner's claims against the assets (versus the claims of others, which are liabilities). Equity will always equal what is owned (assets) minus what is owed (liabilities).

EQUITY = ASSETS - LIABILITIES