Equity
The owners stake in a business after all liabilities are paid.
Equity represents the residual value of a business after subtracting all liabilities from total assets. It increases when the business earns profits or receives investment, and decreases with losses or distributions. For sole proprietors it's the owner's capital account; for corporations it includes common stock, retained earnings, and paid-in capital.
Formula
Equity = Total Assets − Total LiabilitiesExample
A small business has $150,000 in total assets and $90,000 in total liabilities—the owner's equity is $60,000, the portion truly "owned" free of debt.
Why It Matters for Your Business
Growing equity means your business is building real wealth, while shrinking equity is a warning sign that you may be over-leveraged.
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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