Equity (finance)

In accounting and finance, equity is the difference between the value of the assets/interest and the cost of the liabilities of something owned. For example, if someone owns a car worth $15,000 but owes $5,000 on that car, the car represents $10,000 equity. Equity can be negative if liability exceeds assets.

In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the equity of a company as divided among individual shareholders of common or preferred stock. Accounting shareholders are the cheapest risk bearers as they deal with the public. Negative shareholders' equity is often referred to as a (positive) shareholders' deficit.

For the purposes of liquidation during bankruptcy, ownership equity is the portion of a business's equity which remains for the owners after all liabilities have been paid and all other creditors have been reimbursed.

Ownership equity

When starting a business, the owners put funds into the business to finance various business operations. Under the model of a private limited company, the business and its owners are separate entities, so the business is considered to owe these funds to its owners as a liability in the form of share capital. Throughout the business's existence, the value (equity) of the business will be the difference between its assets (the value it provides) and its liabilities (the costs, such as the initial investments, which its owners and other creditors put into it); this is the accounting equation.