What is Equity?
Equity can refer to the amount of money that an owner and/or shareholders has invested in a business, and it can also refer to the potential value of the business. For example, the value that would be returned to the owner or shareholders if all assets were liquidated, and all debts paid off. Essentially it is the net worth of the business. To calculate the equity of a business, you take the total assets minus its total liabilities. For example: if the business has $5,000 worth of assets, owes $2,000 for a bank loan, and made $1,000 this month. The current equity for the business is $4,000 ($5,000 - $2,000 + $1,000 + $4,000). Equity is often used to calculate the health of a business.