The most common formula for equity is: Equity = Assets − Liabilities. This works whether you’re calculating a company’s shareholders’ equity on a balance sheet or figuring out how much equity you have in your home. The underlying idea is the same: equity is what’s left over after you subtract what’s owed from what’s owned.
The Basic Equity Formula
Equity measures ownership value. In its simplest form, you take the total value of everything owned (assets) and subtract the total of everything owed (liabilities). The remainder is equity.
This relationship is the foundation of the accounting equation, which is written as:
Assets = Liabilities + Equity
Rearranging that gives you the equity formula directly:
Equity = Assets − Liabilities
If a company has $500,000 in total assets and $300,000 in total liabilities, its equity is $200,000. That $200,000 represents the portion of the company’s value that actually belongs to its owners. If the company were to sell everything it owns and pay off every debt, the leftover cash would theoretically equal the equity figure.
Shareholders’ Equity on a Balance Sheet
For publicly traded companies, equity is listed on the balance sheet as “shareholders’ equity” or “stockholders’ equity.” While the top-level formula is still assets minus liabilities, that number is built from several components that each tell you something different about the company’s finances.
- Common and preferred stock: The par value of all shares the company has issued to investors, officers, and insiders. Par value is a nominal face value assigned to each share, often just a few cents.
- Additional paid-in capital (APIC): The amount investors paid above par value when they bought shares directly from the company, such as during an IPO. If a share has a par value of $1 but investors paid $25 for it, the extra $24 per share goes into this category.
- Retained earnings: Profits the company has kept over time rather than paying out as dividends. This is typically the largest line item in shareholders’ equity. Companies use retained earnings to pay down debt, fund new projects, or reinvest in operations.
- Treasury stock: Shares the company has bought back from investors. Because buybacks reduce the number of shares available to the public, treasury stock is recorded as a negative number that lowers total equity.
Putting those together, the expanded formula looks like this:
Shareholders’ Equity = Common Stock + Preferred Stock + APIC + Retained Earnings − Treasury Stock
Both versions, the simple formula and the expanded one, should produce the same result. The simple version (assets minus liabilities) gives you the total. The expanded version breaks that total into its source components so you can see where the equity came from.
Book Value vs. Market Value
The equity figure on a balance sheet is known as book value. It reflects historical costs and accounting adjustments, not necessarily what investors think the company is worth today. A company’s market value, by contrast, depends on what people are willing to pay for its stock at any given moment.
Market value is calculated differently:
Market Value (Market Capitalization) = Share Price × Total Shares Outstanding
A company with 10 million shares trading at $50 each has a market capitalization of $500 million, even if its book value of equity is only $200 million. That gap exists because the stock market prices in things like brand reputation, growth potential, and intellectual property that don’t always show up on a balance sheet. When someone refers to a company’s “equity value” in an investing context, they usually mean market capitalization rather than book value.
Home Equity Formula
The same logic applies to real estate. Your home equity is the portion of your property’s value that you actually own, free of any debt.
Home Equity = Fair Market Value of Home − Outstanding Mortgage Balance
If your home is worth $410,000 and you still owe $220,000 on your mortgage, you have $190,000 in equity. If you also have a home equity loan or a second lien, subtract that balance too. Every dollar of debt secured by the property reduces your equity.
Home equity changes over time in two ways. It grows as you pay down your mortgage principal and as your property appreciates in value. It can shrink if property values fall. In a significant downturn, you could end up in negative equity, meaning you owe more on your mortgage than the home is currently worth.
When Each Formula Applies
The version of the equity formula you need depends on what you’re trying to measure. If you’re reading a company’s financial statements or studying accounting, use Assets − Liabilities to find total equity, and look at the expanded components for a deeper breakdown. If you’re evaluating a stock as an investment, market capitalization (share price times shares outstanding) gives you the market’s real-time assessment. If you’re a homeowner trying to figure out how much of your house you actually own, subtract your remaining mortgage from your home’s current market value.
In every case, the core concept stays the same: equity is the value that belongs to the owner after all debts are accounted for.