Equity (finance)

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

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 or . Negative shareholders' equity is often referred to as a shareholders' deficit.

Alternatively, equity can also refer to the capital 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.

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.

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