What is the definition of equity in financial terms?

Equity in financial terms is defined as the residual interest in the assets of an entity after deducting all its liabilities. This means that equity represents the ownership value that shareholders have in the company. When all of the entity’s debts (liabilities) are subtracted from its total assets, what remains is the equity, which can be thought of as the net worth of the business from the perspective of its owners.

This definition encompasses various forms of equity, including common stock, retained earnings, and additional paid-in capital. It reflects the amount that would be returned to the owners if all the assets were liquidated and all the liabilities paid off. This concept is fundamental to understanding an entity's financial health, as it indicates the value that the owners or shareholders truly possess after all obligations are settled.

The other options, while mentioning important financial concepts, do not capture the comprehensive nature of equity. The initial investment made by the owners refers specifically to the capital provided at the beginning and does not account for the overall financial standing of the entity. The total revenue generated reflects income but does not involve liabilities or the ownership stake. Lastly, total liabilities represent debts and obligations, not the residual interest that equity signifies.