What is the formula for determining equity?

What is the formula for determining equity?

• A. Equity = Liabilities / Assets
• B. Equity = Assets x Liabilities
• C. Equity = Liabilities - Assets
• D. Equity = Assets - Liabilities

Answer: (D)

In accounting, equity is the residual claim of the owners on the assets after all liabilities are settled. The fundamental relationship is Assets = Liabilities + Equity, so rearranging gives Equity = Assets − Liabilities. This shows that the portion of assets not needed to settle debts belongs to the owners. For example, if assets total 1,000 and liabilities total 600, equity is 400. The other formulas don’t fit this basic equation, since they combine assets and liabilities in ways that don’t reflect the owners’ remaining stake.

In accounting, equity is the residual claim of the owners on the assets after all liabilities are settled. The fundamental relationship is Assets = Liabilities + Equity, so rearranging gives Equity = Assets − Liabilities. This shows that the portion of assets not needed to settle debts belongs to the owners. For example, if assets total 1,000 and liabilities total 600, equity is 400. The other formulas don’t fit this basic equation, since they combine assets and liabilities in ways that don’t reflect the owners’ remaining stake.