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In accounting, equity (or owner's equity) is the difference between the value of the assets and the value of the liabilities of something owed. It is governed by the following equation:

{\displaystyle {\text{Equity}}={\text{Assets}}-{\text{Liabilities}}} {\displaystyle {\text{Equity}}={\text{Assets}}-{\text{Liabilities}}}
For example, if someone owns a car worth $15,000 (an asset), but owes $5,000 on a loan against that car (a liability), the car represents $10,000 of equity. Equity can be negative if liabilities exceeds assets. Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the equity of a company as divided among shareholders of common or preferred stock. Negative shareholders' equity is often referred to as a shareholders' deficit.

Alternatively, equity can also refer to the capital stock of a corporation. The value of the stock depends on the corporation's future economic prospects. For a company in liquidation proceedings, the equity is that which remains after all liabilities have been paid.

Owner's equity[edit]
When starting a business, the owners fund the business to finance various 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 equity of the business will be the difference between its assets and debt liabilities; this is the accounting equation.

When a business liquidates during bankruptcy, the proceeds from the assets are used to reimburse creditors. The creditors are ranked by priority, with secured creditors being paid first, other creditors being paid next, and owners being paid last. Owner's equity (also known as risk capital or liable capital) is this remaining or residual claim against assets, which is paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, the owner's equity is reduced to zero because nothing is left to reimburse it.

Accounting[edit]
In financial accounting, owner's equity consists of the net assets of an entity. Net assets is the difference between the total assets and total liabilities.[1] Equity appears on the balance sheet (also known as the statement of financial position), one of the four primary financial statements.

The assets of an entity can be both tangible and intangible items. Intangible assets include items such as brand names, copyrights or goodwill. Tangible assets include land, equipment, and cash. The types of accounts and their description that comprise the owner's equity depend on the nature of the entity and may include:

Share capital (common stock)
Preferred stock
Capital surplus
Retained earnings
Treasury stock
Stock options
Reserve[2]
Book value[edit]
The book value of equity will change in the case of the following events:

Changes in assets relative to liabilities. For example, a profitable firm receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit, increases its retained earnings, therefore its shareholders' equity.
Issue of new equity in which the firm obtains new capital increases the total shareholders' equity.
Share repurchases, in which a firm returns money to investors, reducing on the asset side its financial assets, and on the liability side the shareholders' equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares outstanding.
Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income[citation needed](from the point of view of the common share owners).