Final answer:
Equity is the residual interest in a business's assets after liabilities are deducted and can be affected by owner investments and distributions. T-accounts demonstrate that assets equal liabilities plus net worth. Equity in tangible assets, like a house, is the difference between the market value and outstanding loans.
Step-by-step explanation:
The concept of equity refers to the residual interest in the assets of a business after deducting liabilities. In other words, equity represents the ownership value in the business. It is an important part of a company's balance sheet and can be impacted by various activities. Some activities that affect equity include investments by owners into the business and distributions or dividends paid out to shareholders. These transactions increase or decrease the owner's equity in the business respectively.
For example, when an owner contributes more capital, this increases the equity in the business. Conversely, when a business issues dividends to shareholders, it distributes part of its earnings, reducing the equity. Moreover, other changes in assets or liabilities, such as gaining assets or taking on new debts, also impact equity.
Utilizing a T-account for visualization, we can see that in the case of a bank, assets must always equal liabilities plus net worth, where net worth is the equity that remains when all liabilities are subtracted from total assets. For an individual, equity can also be observed in tangible assets, such as a house, where equity is the home's market value minus any outstanding mortgage loans.