How is 'equity' defined in accounting terms?

In accounting, equity refers to the residual interest in the assets of a company after all liabilities have been deducted. This definition indicates that equity represents the ownership stake that shareholders have in the company. It can be understood as the value of the company that belongs to its owners, and it is calculated by subtracting total liabilities from total assets.

This concept of equity is crucial for investors and stakeholders as it reflects the net worth of a business. When a company has more assets than liabilities, it has positive equity, which is a sign of financial health. If the opposite is true, the equity could be negative, indicating potential financial issues.

Equity also forms an essential part of the accounting equation: Assets = Liabilities + Equity. This equation illustrates that a company's assets are financed either by debt (liabilities) or by equity (shareholder contributions), so understanding how equity fits into this equation is fundamental to grasping the overall financial structure of a business.