What is the definition of equity in accounting?

Equity in accounting represents the residual interest in the assets of a company after all liabilities have been deducted. This definition captures the essence of equity as it reflects the net worth of the entity. It is essentially what the owners or shareholders own after all obligations to creditors have been fulfilled.

Understanding equity is crucial because it not only indicates the financial health of a business but also serves as a measure of the ownership stakes in the company. It can come from various sources, including retained earnings and contributions from owners or shareholders. In a balance sheet context, equity is found on the right side, and it includes items such as common stock, preferred stock, additional paid-in capital, and retained earnings. Therefore, equity serves as an important metric for investors assessing a company’s financial position and performance.

The other definitions listed do not accurately encapsulate the concept of equity. The total assets of a company refer to everything that the company owns, liabilities refer to the company's debts, and total revenue relates to the income generated from operations, none of which define the interest the owners have in the firm after settling outstanding debts.