Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned.
A business that needs to start up or expand its operations can sell its equity in order to raise cash that does not have to be repaid on a set schedule.
The equity balance—the asset's market value reduced by the loan balance—measures the buyer's partial ownership.
This may be different from the total amount that the buyer has paid on the loan, which includes interest expense and does not consider any change in the asset's value.
Various types of equity can appear on a balance sheet, depending on the form and purpose of the business entity.
Retained earnings (or accumulated deficit) is the running total of the business's net income and losses, excluding any dividends.
Investors in a newly established firm must contribute an initial amount of capital to it so that it can begin to transact business.
Under the model of a private limited company, the firm may keep contributed capital as long as it remains in business.
If the equity is negative (a deficit) then the unpaid creditors bear loss and the owners' claim is void.
A company's shareholder equity balance does not determine the price at which investors can sell its stock.
Other relevant factors include the prospects and risks of its business, its access to necessary credit, and the difficulty of locating a buyer.