How is equity defined in accounting?

Equity in accounting represents the ownership interest in a company, specifically describing the owner’s residual claim on the assets of the business after all liabilities have been settled. Essentially, it is calculated as the difference between total assets and total liabilities, illustrating what belongs to the owners after debts have been accounted for. This concept is central to the accounting equation: Assets = Liabilities + Equity.

By understanding equity this way, it becomes clear that it reflects the net worth of the business from the owner’s perspective, highlighting their stake in the company. This is essential for financial reporting and analysis, as it informs stakeholders about the financial health of the business and the value attributable to its owners.