Definition:
Equity is the shareholders’ “stake” in the company as measured by accounting rules. It’s also called the company’s book value. In accounting terms, equity is always assets minus liabilities; it is also the sum of all capital paid in by shareholders plus any profits earned by the company since its inception minus dividends paid out to shareholders. That’s the accounting formula, anyway. Remember that what a company’s shares are actually worth is whatever a willing buyer will pay for them.
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Example:
Net income appears under owners’ equity as retained earnings. A net loss decreases equity. In our sample company, the Owners’ Equity section increased because of the increase in Retained Earnings. Amounts shown in thousands.
Book Excerpt:
(Excerpts from Financial Intelligence, Chapter 12 – On the Other Side)
Equity includes the capital provided by investors and the profits retained by the company over time. Owners’ equity goes by many names, including shareholders’ equity and stockholders’ equity. The owners’ equity line items listed in some companies’ balance sheets can be quite detailed and confusing. They typically include the following categories: preferred shares, common shares or common stock, and retained earnings.
