What does the term 'equity' refer to in financial reporting?

In financial reporting, the term "equity" refers specifically to the residual interest in the assets of a company after the deduction of liabilities. This is fundamentally represented as assets minus liabilities. Equity represents the ownership value held by shareholders and reflects the net worth of a business. It is an essential component of the financial statements, particularly on the balance sheet, where it indicates how much of the company is financed by owners versus creditors. This concept is crucial for stakeholders in understanding the financial health and stability of the entity. Hence, the correct interpretation of equity aligns perfectly with the idea that it is what remains after all debts have been accounted for, which is captured accurately in the definition of assets minus liabilities.