What does equity represent in a business?

Equity in a business context represents the ownership value that shareholders have in the company. It is calculated as the difference between total assets and total liabilities. This foundational accounting equation demonstrates what is left for the owners after all debts and obligations have been settled, providing a clear picture of the net worth of the business.

When considering a company’s balance sheet, total assets represent everything the company owns, while total liabilities reflect what it owes. By subtracting liabilities from assets, you arrive at the equity, which shows the amount that shareholders theoretically would receive if the company were liquidated.

In the context of the other choices, total revenue minus total expenses measures profit, not equity. Total profit over total sales indicates a profitability ratio, which is a different concept. Total assets plus total liabilities does not reflect the owner's equity; instead, it duplicates liabilities, as it combines both sides of the accounting equation, rather than isolating equity itself. Thus, equity's definition is specifically linked to the relationship between assets and liabilities, making it fundamental to understanding a business’s financial health and ownership structure.