John C. answered • 10/05/21
Professional private tutor: English, History, Government, Essays, ACT
Equity is essentially how much of something you actually own. Thus, let's look at your definition: "Owner's equity is the owner's remaining interest in the assets of the company after deducting all it's liabilities." So, the owner's equity equals their interest in the company (how much ownership do they have? Full = 100%, but maybe they are just a partner) minus the company's debts. You could consider an example as such: you and your 2 friends decide to split to price of a pizza. The pizza is 8 dollars and comes in 8 slices. You pay for half ($4), and each of your friends pay for a quarter ($2 each). Here, your simple equity would be that you own half and your friends each own a quarter of the entire pizza. However, if you have a debt to one of your friends, then that debt can be taken into account. So, let's imagine you owe each of your friends $2. Now, your obligation to pay them back could be illustrated with the pizza. Instead of you 'owning' half of it, your friends call for repayment of their debts, and you now own none of it. The point of the example is that your equity was always low due to your hypothetical liability (the money you owed your friends). The point of defining equity like this is that 'ownership' can be a nebulous term. Many people say they 'own' their homes, but if they have a mortgage loan, then we would say that they 'own' the proportional percentage of the home to the amount they have already paid down their loan. This, again, refers to equity. For your own example, try asking the homeowners you know how much equity they have in their home. The number that they tell you will illustrate how much of the sale price of their home they have already paid and how much remains to be paid to the bank.
If any of this is unclear, please reach out to schedule a lesson for additional clarity!
Lola P.
Thank you so much for the explanation, it was very helpful, I really appreciate it.10/06/21