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Equity: Definition and Meaning
Definition
Equity is the residual interest in a business after liabilities are subtracted from assets. It represents the owners’ interest in the company, subject to the company’s obligations.
Why It Matters
Equity can reflect owner investments, retained earnings, prior losses, distributions, and other changes in the company’s capital structure. Lenders, sureties, owners, and advisors may consider equity when evaluating financial strength and leverage.
Equity is not the same as cash or market value. Its meaning depends on the quality and book value of assets, the completeness of liabilities, and the accounting framework used.
Example
If a company has $1 million in assets and $600,000 in liabilities, its equity is $400,000.
Related Terms
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