What is a company's owner's equity?

Owner's equity represents the ownership interest in a company, reflecting what is left after all liabilities have been subtracted from total assets. It is essentially the net worth of the company and indicates how much the owners or shareholders would receive if all assets were liquidated and all debts paid off. This definition aligns with the correct option, which describes owner's equity as the residual interest in the assets of the entity after deducting liabilities.

Understanding this concept is crucial in financial accounting because it helps investors, stakeholders, and management gauge the health and stability of a business. Owner's equity is not simply a distribution of assets among shareholders or a stockpile of cash reserves but encompasses the broader financial relationship between what the business owns (assets) and what it owes (liabilities). This relationship is fundamental in assessing a company's financial position and viability.