Equity

Expanded Explanation: Equity is the residual interest in the assets of the business after deducting liabilities. In a broader sense, it represents the ‘net worth’ of a business. Equity can increase through additional owner investments and profits and decrease through losses and owner withdrawals.

Potential Issues: Misunderstanding or misrepresenting equity can lead to poor decision-making regarding distributions, reinvestments, and assessing the overall health of the business. Overestimating equity can lead to excessive borrowing or risky business strategies.

Example: If you initially invested $50,000 in your graphic design business and now have assets worth $70,000 and liabilities of $20,000, your business equity is $50,000.