
Cathy B. answered 05/23/19
Managerial Accounting Professor
Equity is sometimes called net assets. It is the difference between assets and liabilities. The basic accounting equation is Assets = Liabilities + Equity. If our interest is in defining equity, we could rewrite the formula, solving for equity, and it would be Equity = Assets - Liabilities. In a personal finance framework, I would liken it to net worth. It's the equity, or ownership you hold in your assets, because it's the value of those things you own that exceeds the amount of debt you may have used to acquire them. Things that can increase equity in business include: income, and capital contributions. In personal finance, income would work the same way because it would increase your assets and your net worth simultaneously. Expenses and owner withdrawals will reduce equity as you indicated. Similarly, that is because the expenses require payment and reduce assets. Because we typically do not recognize or record increases in value for our long-term assets unless we are selling them, equity over time often fails to accurately estimate the true value potentially available if all liabilities were satisfied with existing assets.