Equity

Definition

Equity represents the owner's residual interest in the assets of a business after deducting liabilities. It is calculated as Total Assets minus Total Liabilities.

5 Must Know Facts For Your Next Test

1. Equity is reported on the Balance Sheet.
2. Types of equity include common stock, retained earnings, and additional paid-in capital.
3. An increase in revenues or owner contributions increases equity.
4. A decrease due to expenses or withdrawals by the owner decreases equity.
5. The Statement of Owner's Equity shows changes in equity over a period.

Review Questions

• How is equity calculated?
• What types of accounts are included under equity?
• Which financial statement details changes in equity?

Related terms

Assets:

Resources owned by a company that have economic value.

Liabilities:

Obligations that a company needs to settle in the future.

Retained Earnings:

The accumulated net income left in the company after dividends are paid out.