Accounting – 5.3 Limited companies | e-Consult

Equity represents the owners' stake in a business. It's the residual interest in the assets of the business after deducting all liabilities. Essentially, it's what would be left for the owners if all the assets were sold and all the debts were paid.

Liabilities, on the other hand, are what the business owes to external parties (creditors) – such as loans, salaries payable, and accounts payable. Equity is the difference between the business's assets and its liabilities. A simple way to think about it is: Equity = Assets - Liabilities. If liabilities exceed assets, the business is insolvent.