Equity
Definition
The owners' stake in the business: what is left after subtracting everything the business owes from everything it owns. It includes money owners put in plus profits kept in the business.
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Formula
Equity = Assets − LiabilitiesEquity grows when the business earns profit and keeps it, and shrinks with losses and owner distributions. Over time, it is a simple scorecard for whether the business is building value.
For S corps and partnerships, it is split into contributions, distributions and retained earnings. Watch for: negative equity, which means the business owes more than it owns and lenders will notice.
Example
$600,000 of assets and $350,000 of liabilities leaves $250,000 of owner's equity.