What does 'equity' represent?

Equity represents the owner's interest in the business and is calculated as the difference between total assets and total liabilities. This concept is fundamental in accounting, as it reflects what the owner would have left if all the business's assets were liquidated and all its debts settled.

When assets are greater than liabilities, equity indicates a positive ownership interest, showcasing potential value to the owner or shareholders. Conversely, if liabilities exceed assets, equity can be negative, signifying that the business owes more than it owns. This measurement is critical for stakeholders to assess the financial health of a business and its ability to generate value for owners or shareholders over time.

The other options do not accurately define equity: obligations owed to shareholders pertain more to liabilities; total income from sales relates to revenue rather than ownership interest; and the total of all liabilities solely reflects the debts and does not encompass the owner's stake in the business. Understanding equity is essential for financial analysis and business valuation.