In accounting, what does equity represent?

Equity represents the ownership interest in a company and is calculated as total assets minus total liabilities. This definition reflects the residual interest that shareholders have after all debts and obligations are settled. In other words, equity shows what the owners of the company would receive if all assets were liquidated and all liabilities paid. This perspective is crucial in understanding the financial health and value of a business, as it relates to the stakeholders' claims on the company's resources.

The concept of equity is central to the accounting equation (Assets = Liabilities + Equity), which underpins double-entry bookkeeping. By knowing equity, investors can evaluate their stake in the overall financial performance of the company and assess its potential for growth or return on investment over time.