What does equity represent on a balance sheet?

Equity on a balance sheet represents the net worth of a company from the perspective of its owners, which includes both the stockholders' initial investments as well as any retained profits that the company has accrued over time. This reflects the residual interest in the assets of the company after deducting liabilities. When a company generates profits and retains them rather than distributing all of it as dividends, these profits contribute to the equity, signifying the growth and financial health of the business.

This is crucial for potential investors and stakeholders as it indicates how much of the company's assets are financed through ownership rather than debt. In the grand scheme, equity is a key component of the accounting equation, where assets equal liabilities plus equity, providing a clear picture of the company's financial position and stability.