In accounting terms, what equation represents equity?

Equity in accounting represents the ownership interest in a business, which is calculated using the fundamental accounting equation: Assets = Liabilities + Equity. By rearranging this equation, we can express equity as the difference between assets and liabilities. Therefore, the correct formulation of equity is Equity = Assets - Liabilities.

In this context, assets represent what the business owns, and liabilities represent what it owes. By subtracting liabilities from assets, you arrive at the equity, which indicates the net worth of the business after all obligations have been settled. This relationship is crucial in understanding a company’s financial position, allowing stakeholders to determine the residual value that shareholders would have after all debts are paid.

Understanding this equation is foundational in accounting and financial analysis, as it provides insight into the financial health and stability of a business. This concept is universally applicable in financial statements and analysis, making it an essential part of accounting education.