What is equity in accounting?

What do you mean by equity in accounting?

• Our book says that its the residual interest in the assets of the enterprise after deducting all its liabilities. In simpler terms what do you mean by this?

• Answer:

  Assets = Liabilities + Equity. The liabilities and equity both have 'claims' on the asset, i.e. they sort of 'own' the asset (but I use the term 'own' VERY loosely here). Think of this 'ownership' as 'interest'. The word 'residual' means the remainder, the bits that are left over. So. The equity and liabilities both have interest in the assets of the enterprise. Which means that the equity has interest in the assets of the enterprise but only the assets that don't already belong to the liabilities, yeah? So that means that the equity is equal to the residual interest in the assets once you subtract the liabilities. It might be a confusing definition now, but it will make more sense if you ever study how things work during liquidation, and the rights that debtholders and equity holders have over the assets. In the meantime, though, hope that helped!