Equity definition

Equity is the net amount of funds invested in a business by its owners, plus any retained earnings. It is also calculated as the difference between the total of all recorded assets and liabilities on an entity's balance sheet. An analyst routinely compares the amount of equity to the debt stated on a balance sheet to see if a business is properly capitalized.

The equity concept also refers to the different types of securities available that can provide an ownership interest in a corporation. In this context, equity refers to common stock and preferred stock.

For an individual, equity refers to the ownership interest in an asset. For example, a person owns a home with a market value of $500,000 and owes $200,000 on the related mortgage, leaving $300,000 of equity in the home.

Related Courses

Bookkeeping Guidebook
How to Audit Equity
The Balance Sheet