In accounting, what does "equity" represent?

Equity in accounting refers to the owners' residual interest in the assets of a business after all liabilities have been deducted. This concept embodies the notion that equity represents what is truly owned by the shareholders or owners of the company once obligations to creditors and other liabilities are settled.

In a balance sheet context, equity is essentially what remains after subtracting total liabilities from total assets. It encompasses not only the initial contributions made by owners, such as capital invested, but also includes retained earnings, which are profits that have been reinvested in the business rather than distributed as dividends. Therefore, the correct interpretation captures the complete picture of ownership interest, accounting for all forms of funding and profits retained within the company.

Other options narrow the definition of equity too much or misrepresent its components. For instance, focusing solely on financial contributions excludes retained earnings, while stating equity as only retained earnings overlooks the initial capital contributions and overall ownership stake. Furthermore, suggesting equity is merely cash reserves available for distribution misrepresents its broader scope and intention, which includes a measure of all net assets available to the owners.