What is Owner’s Equity?
Owner’s equity is the residual claim of the owner (or partners) on the assets of a business after deducting all liabilities. In sole proprietorships and partnerships, it is composed of capital contributions, additional investments, accumulated profits, and withdrawals (drawings). The accounting equation Assets = Liabilities + Equity always holds.
How It Works
- Opening balance = closing equity of the prior period.
- Add capital contributions during the period.
- Add net profit for the period (or subtract net loss).
- Subtract owner drawings or distributions.
- Result is the closing balance reported on the balance sheet.
Saudi Context
Saudi sole proprietorships and partnerships registered under the Companies Law track owner’s equity on a per-partner basis. Sole proprietors operating under a Commercial Registration (CR) report equity changes in their financial statements submitted to ZATCA, particularly for the annual zakat declaration based on the zakat base.
Example
An owner starts a business by contributing SAR 200,000 of capital. The business earns SAR 80,000 of net profit and the owner withdraws SAR 30,000 during the year. Closing owner’s equity = 200,000 + 80,000 – 30,000 = SAR 250,000.