In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists.
In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.
At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered, for accounting purposes, sums of liabilities and assets. After liabilities have been accounted for, the positive remainder is deemed the owners' interest in the business.
This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or residual claim against assets, settled only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity; which is thus reduced to zero. Ownership equity is also known as risk capital or liable capital.
In financial accounting, equity capital is the owners' interest on the assets of the enterprise after deducting all its liabilities. It appears on the balance sheet/statement of financial position, one of the four primary financial statements. Ownership equity includes both tangible and intangible items (such as brand names and reputation/goodwill). Accounts listed under ownership equity include (for example):
- Share capital (common stock)
- Preferred stock
- Capital surplus
- Retained earnings
- Treasury stock
- Stock options
- Reserve
Sample Balance Sheet
Sample of a small business's balance sheet, showing owners' equity.