What does equity in accounting represent?

Equity in accounting represents the ownership interest in a company after all liabilities have been deducted. It essentially reflects the residual claim of the owners on the assets of the firm. When a company is liquidated, equity holders are the last to be paid after all debts and obligations have been settled. This is why equity is often referred to as "net assets" or "shareholder's equity" because it is calculated as total assets minus total liabilities.

In the context of a company's balance sheet, equity is comprised of components such as common stock, preferred stock, additional paid-in capital, and retained earnings. Understanding equity is crucial for investors and stakeholders, as it indicates the financial health of a company and the value attributed to shareholders. This ownership interest plays a fundamental role in evaluating a company’s financial position and investment potential.