Owner’s Capital/Equity

Owner’s Capital/Equity

The owner’s capital is the amount invested by the owner in the business whether it is a proprietary concern, partnership firm, or Company. It reflects how much assets are financed by the owner’s fund. In the company we use the owner’s equity instead of the owner’s capital which represents the amount invested by the shareholders in the company or the sum of money that belongs to the shareholders of the company.  

Explanation

The owner’s capital is the total sum invested and accumulated with time by the sole proprietor in his business. It is total assets less total liabilities. In the case of sole proprietorship amount invested by the sole proprietor is called the owner’s capital. In the case of a partnership firm net capital contribution of the partner is termed as owner’s capital.

In the case of company shareholders are the owners of the company, therefore, the amount invested by shareholders plus retained earnings are termed as owners’ Equity.

Components

Components of owner’s capital differ for a different type of entity:

In the case of proprietorship:

Amount invested by the sole proprietor

Add: Accumulated profit

Add: Additional Capital introduced in the business

Less: Withdrawals for personal use

In the case of a Partnership firm:

Capital Contribution made by each partner

Add: Accumulated profit

Add: Additional capital introduced

Less: Salary paid to partners

Less: Withdrawn from the business for personal use

In the case of Company:

The Equity Share capital of the company

Add: Preference Share capital of the company

Add: Reserves and surplus (like securities premium, free reserves, etc.)

Less: Miscellaneous Expenses not written off

Example of Owner’s Equity

Sole Proprietor initially started the business by introducing capital amounting to $ 500,000. Further, he invested $ 100,000, Accumulated profit was $ 220,000 and drawings made were $ 225,000. Calculate the owner’s Capital.

Solution:

The calculation of the owner’s capital after taking into account all the transaction is as follows:

Particulars        $
Capital Introduction500,000
Add: Addition       100,000
Add: Accumulated Profit220,000
Less: Drawings       -225,000
Owner’s capital      595,000

Therefore, the owner’s capital at the given point of time is $ 595,000.

The following data is related to Webcam Ltd. From the given data, calculate the capital of the company.

Particulars                                       $
Ordinary Shares                           100,000
Preference Shares                        30,000
Retained Earnings                        20,000
Total Assets                              500,000
Total Liabilities                         350,000

Solution:

Owner’s Equity = Ordinary shares + preference shares + Retained Earnings

= $100,000 + $ 30,000 + $ 20,000

= 150,000

OR

Owner’s Equity = Total Assets – Total Liabilities

= $ 500,000 – $ 350,000

= $ 150,000

Therefore, owner’s Equity is 150,000

Advantages

Advantages of Owner’s Capital/Equity are as under:

  • It helps to calculate the net funds owned by owners after deducting all the liabilities.
  • It helps in planning the expansion and diversion of business.
  • It helps investors, creditors, etc. to determine the net worth of the organization.
  • With the help of the owner’s equity, the organization can ascertain whether the organization has gained over the years or made a loss.
  • Positive and sufficient owner’s equity helps to get the loan easily for expansion or working capital for business.
  • Business can measure the growth with the help of positive and continuous increased owner’s equity.

Disadvantages

Disadvantages of Owner’s Capital/Equity are as under:

  • In the case of a company, if the owner’s equity is large, investors expect the large returns on their investment.
  • In the case of the partnership business, if the drawings of all partners are not equal then there are chances of a conflict.
  • If the owner’s equity is negative, there are chances of loss of faith by creditors, and credit given by them also get affected.

Final Thought

The owner’s equity is the amount that is invested by the owners in the business. In the case of a proprietorship firm, it is calculated as the amount contributed by the owner plus profits less drawings. In the case of a partnership firm, it is the sum of the partner’s net capital i.e. capital contribution and profits after deduction of salary, drawings, etc. whereas in the case of the company it is the sum of share capital plus reserves and surplus less miscellaneous expenses not written off. In all the above case the capital can also be calculated by deducting total liabilities of the business from its total assets The negative owner’s capital negatively affects the growth of the business organization.

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Related Articles

  1. Basic Accounting Terms
  2. What are Assets?
  3. What are Liabilities?
  4. What are Expenses
  5. What is Income?

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