Equity

Definition

Equity, in financial terms, refers to the ownership interest or residual value that remains in a company after deducting its liabilities from its assets.

What is equity?

It represents the portion of a company’s assets that belongs to its owners or shareholders. Essentially, equity is the value that shareholders hold in a company, and it can be thought of as the difference between a company’s total assets and its total liabilities. Equity provides a measure of the company’s net worth and is a key component of the company’s balance sheet. It can also be referred to as “shareholders’ equity” or “stockholders’ equity.”

Example of equity

Let’s consider a fictional company, XYZ Inc., with the following financial information:

• Total assets: $1,000,000
• Total liabilities: $400,000

$\text{Equity}=\text{Total a}$$\text{ssets }-\text{Total liabilities}$

$\text{Equity}=\; \$1,000,000-\; \$400,000=\; \$600,000$

In this case, the equity of XYZ Inc. is $600,000. This amount represents the ownership interest that shareholders have in the company after accounting for all its liabilities.