What is the Equity Equation?

The equity equation, also referred to as the accounting equation, demonstrates the link between a company’s assets, liabilities, and equity. It can be expressed as:

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Equity = Assets – Liabilities

This equation emphasizes that a company’s equity represents the remaining interest in its assets after accounting for liabilities. In simpler terms, it denotes the ownership stake of shareholders or owners in the business. The equity equation plays a critical role in keeping financial statements balanced and aids in comprehending how the company funds its assets, whether through owner investments or external liabilities.