Assets are financed both by debt and equity. Equity represents the net assets of a corporation. This concept can be compared to owning a house (asset) with an outstanding mortgage note (liability). If the house is valued at $200,000 and the payoff on the mortgage note is $140,000, then the equity in the house is $60,000. A company’s balance sheet is viewed in much the same way. It is composed of many assets, a variety of liabilities, and a resid- ual interest (equity) in those assets. The relationship between the three defines the balance sheet equation.