What is the definition of Owner's Equity?

Owner's equity, often referred to as shareholders' equity or net assets, represents the residual interest in the assets of an entity after all liabilities have been deducted. This definition highlights that owner’s equity is essentially what is left for the owners or shareholders once all debts and obligations are settled.

When a business generates profits, these profits contribute to owner’s equity by increasing the net assets of the business. However, it's important to distinguish that the profits themselves during a single financial year are not the entirety of owner’s equity, which encompasses both initial investments and retained earnings accumulated over years.

Understanding that owner’s equity is connected to the balance sheet, it reflects the ownership stake in the business, forming a crucial part of the accounting equation: Assets = Liabilities + Owner's Equity. This approach helps illustrate the financial health and leveraged structure of a business.