In business and accounting, equity is the value that would be returned to owners after selling all assets and paying off all debts. The formula is Equity = Total Assets − Total Liabilities. It represents the owners' (or shareholders') stake in the company.
What Is Equity?
Equity reflects ownership value — what's left for the owners once every liability is settled. It applies whether you're a sole proprietor, a shareholder, or an investor. On the balance sheet, equity is the third pillar of the accounting equation: Assets = Liabilities + Equity.
Equity Formula
Equity = Total Assets − Total LiabilitiesOwners' / shareholders' equity
Example — a business with $1,000,000 in assets and $600,000 in debts:
$1,000,000 − $600,000 = $400,000 equityThe owners' stake
What's Included in Equity
| Component | Examples |
|---|---|
| Owner investments | Initial capital, stock purchases, paid-in capital |
| Retained earnings | Accumulated profits kept in the business |
| Share capital | Common stock, preferred stock, share premium |
| Adjustments | Treasury stock, accumulated losses, revaluations |
How Equity Is Valued
| Type | Based on |
|---|---|
| Book value | Historical cost (accounting value) |
| Market value | Current trading price (market cap) |
| Fair value | Appraised or adjusted book value |
A big gap between book and market value often signals growth or risk the financial statements don't capture.
Why Equity Matters
- Business value: equity is the owners' net stake in the company.
- Financing & exits: lenders and investors analyze equity before funding; it defines exit payouts.
- Profit sharing: equity drives dividend and ownership decisions.
Equity FAQ
What is equity in simple terms?
It's what owners actually own — the value left after subtracting everything the business owes from everything it has. If assets are $1M and debts are $600K, equity is $400K.
How do you calculate equity?
Use Equity = Total Assets − Total Liabilities. It's the balancing figure in the accounting equation Assets = Liabilities + Equity.
What's the difference between book value and market value of equity?
Book value is equity recorded at historical cost on the balance sheet. Market value is what the market currently prices the equity at (market capitalization for public companies). They often differ significantly.
What is owner's equity vs shareholders' equity?
Same concept, different structures: "owner's equity" is used for sole proprietorships and partnerships; "shareholders' equity" for corporations. Both equal assets minus liabilities.
