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.
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 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Less: Withdrawn from the business for personal use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.
The calculation of the owner’s capital after taking into account all the transaction is as follows:
|Add: Accumulated Profit||220,000|
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.
Owner’s Equity = Ordinary shares + preference shares + Retained Earnings
= $100,000 + $ 30,000 + $ 20,000
Owner’s Equity = Total Assets – Total Liabilities
= $ 500,000 – $ 350,000
= $ 150,000
Therefore, owner’s Equity is 150,000
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 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.
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.