owner's equity
Suppose your house is worth 400,000 but you still owe 250,000 on the mortgage. The part that is genuinely yours — 150,000 — is your equity in the house. Owner's equity in a business works the same way. It is the owners' leftover stake: what remains for them once every outside claim (every debt) has been satisfied.
Owner's equity is defined directly by the accounting equation, rearranged: Owner's Equity = Assets − Liabilities. So if a company owns 500,000 of assets and owes 300,000, the owners' equity is 200,000. For a one-person business this is often called owner's equity or capital; for a company with shareholders it is called shareholders' equity or stockholders' equity. It grows when owners invest more money or when the business earns profit and keeps it (retained earnings), and it shrinks when the business loses money or pays profits out to owners (dividends or drawings).
Equity matters because it tells the owners how much of the business is truly theirs, and it acts as a cushion: the bigger the equity, the more losses a company can absorb before it cannot pay its debts. A frequent misconception is that owner's equity is a pile of cash sitting somewhere, ready to withdraw. It is not — it is a residual claim, a number, not a bank balance. The cash may already be tied up in inventory, equipment, or buildings. Equity tells you the size of the owners' stake, not how much money is available to take out.
A boutique owns assets worth 120,000 and owes 70,000 in total liabilities. Its owner's equity is 120,000 − 70,000 = 50,000 — the owner's true stake. If the boutique then repays 10,000 of debt using cash, equity stays 50,000: both assets and liabilities drop by 10,000.
Equity as the residual: assets minus liabilities, unaffected by simply repaying debt with cash.
Equity is a residual claim, not a cash reserve. A company can have large equity yet little cash, because the value sits in inventory, buildings, or receivables rather than in the bank.