Final answer:
Equity is the owner's interest in the business assets after liabilities are deducted, effectively assets minus liabilities. It represents the net value that would be left if all liabilities were paid off.
Step-by-step explanation:
Equity in the context of a business, particularly a bank's balance sheet, refers to the owner's residual interest in the assets of the business after deducting liabilities. To put it more simply, equity can be understood as assets minus liabilities. This calculation shows what the business would have left over in assets if it settled all its liabilities. For example, a homeowner has a house valued at $200,000 and owes $180,000 on the mortgage; the equity they have in the house is $20,000. Similarly, a bank calculates its net worth by taking the total value of its assets like cash in the vault, reserves at the Federal Reserve, loans to customers, and bonds, and subtracting its liabilities, which include deposits made by customers. The resulting figure is the bank's capital or total equity.