In accounting, the equity of a business represents the residual interest in the entity’s assets after deducting liabilities. The accounting equation, also known as the balance sheet equation, illustrates this relationship:

Assets=Liabilities+Equity

Equity is often referred to as “owners’ equity” or “shareholders’ equity,” depending on the structure of the business. It represents the ownership interest of the owners or shareholders in the company’s assets. Equity can be calculated using the following formula:

Equity=Assets−Liabilities

Several components make up equity:

1. Contributed Capital: This represents the amount of capital the owners or shareholders contribute to the business, typically in the form of investments or initial capital contributions.
2. Retained Earnings: Retained earnings are the cumulative profits or losses of the company that have not been distributed to shareholders in the form of dividends. It reflects the portion of profits that have been reinvested back into the business to support its operations and growth.
3. Accumulated Other Comprehensive Income (OCI): OCI includes gains and losses that have not yet been realized and are reported directly in the equity section of the balance sheet. This may include items such as unrealized gains or losses on investments, foreign currency translation adjustments, and changes in the fair value of certain financial instruments.
4. Treasury Stock: If a company repurchases its shares from the market, those shares are considered treasury stock and are deducted from equity. Treasury stock represents shares that the company holds as a result of buybacks and is typically recorded at cost.
5. Additional Paid-in Capital: This represents the excess amount paid by investors for shares of stock over their par value. It reflects the additional value contributed by investors beyond the nominal value of the shares.

Overall, equity represents the ownership stake of the owners or shareholders in the business and is a key component of the balance sheet, providing insight into the financial health and value of the company.