Equity

Equity can be defined as the difference between the value of the assets and the cost of the liabilities.

Equity= Assets - Liabilities

The above accounting equation represents that while starting a business, the funds invested in it can be divided into two parts. Firstly, equity which signifies the amount which the owner himself has invested and other is liabilities which is the amount borrowed from outsiders and is used in the business.

Example

An entrepreneur has invested $90000 in his business but in order to expand, he requires more $10000. For this, the entrepreneur can raise a loan from a bank. This way, the balance sheet of his business will show $10000 as a liability and $90000 as equity or owner’s funds.