Equity
Equity is what's actually left for the owner once every liability is subtracted from every asset — the owner's real stake in a business or household, built from contributions, draws, and retained profit.
In short
What's genuinely yours. Owner's Contribution and Owner's Draw track money moving in and out; Retained Earnings tracks everything earned and kept over time. Together they make up equity, credit-normal like liabilities and income, and it's the third leg of Assets = Liabilities + Equity.
Also called: owner's equity, net worth
Equity is the owner's actual stake in a business or household — what's left over once every liability is subtracted from every asset. It's one of the five account types, credit-normal like liability and income, and it's the piece of the accounting equation that answers "what genuinely belongs to the owner" rather than "what's owed to someone else."
In practice, equity is rarely one single account doing all the work. Owner's Contribution tracks money or value the owner personally puts in during the current year; Owner's Draw, a contra-equity account, tracks money taken out; Retained Earnings captures everything earned and kept, cumulatively, since the book began, recalculated live every time a balance sheet runs. A general equity account mainly holds the opening balance from when the books were first set up, plus any true-up adjustments.
This year's still-open profit doesn't live directly in equity the way people sometimes expect — current-year income and expenses stay on the profit and loss statement until they roll into Retained Earnings, which happens continuously in BalanceMCP's live calculation rather than through a once-a-year closing step.
Equity is the harder half of the accounting equation to picture intuitively, precisely because it isn't a physical thing the way cash or equipment is — it's a derived figure, the residual claim left once every liability is accounted for. That's exactly why it needs its own set of accounts (contribution, draw, retained earnings) to actually track how it changes over time, rather than being one static number.
What people get wrong
- Expecting to post directly to a general equity account for routine activity instead of the more specific Owner's Contribution or Owner's Draw accounts.
- Assuming this year's profit already sits in equity before a balance sheet is run — it lives on the P&L until Retained Earnings absorbs it.
- Treating equity like a bank balance you can check directly — it's a derived figure computed from assets minus liabilities, not a single account with its own cash.
Common questions
- Is equity the same as cash I can access?
- No — it's a derived figure, assets minus liabilities, representing the owner's overall stake. It isn't a single cash account you draw from directly.
- Where does this year's profit show up before it becomes equity?
- On the profit and loss statement, as ordinary income and expense activity. It becomes part of equity through Retained Earnings, calculated live rather than through a once-a-year entry.
Machine-readable: /api/knowledge/concept:equity