What does 'equity' represent in financial statements?

Equity represents the residual interest of the owners in the assets of the business after deducting liabilities. This definition captures the essence of what equity is within the context of financial statements. Essentially, equity reflects the net worth of the business from the owners' perspective, indicating how much of the assets are financed by the owners' investments rather than by debt.

When financial statements are prepared, assets and liabilities are recorded, and equity is calculated as the difference between the two. It essentially answers the question of what remains for the owners after all obligations to creditors have been settled. This is important for understanding the financial health of a business and the stake that owners have in it.

The other options represent different aspects of the financial position. The total amount of assets owned by a business refers specifically to what the business owns, while the amount owed by the business to its creditors indicates liabilities, which are obligations rather than owners' equity. Finally, total revenue earned by the business focuses solely on income generated, rather than ownership interest in assets. Thus, while all these components are vital to financial reporting, they do not define equity accurately.