How to Calculate Stockholders’ Equity
Stockholders’ equity, also known as shareholders’ equity, represents the ownership interest of the shareholders in the corporation. It is one of the three main components of a corporation’s balance sheet, the other two being assets and liabilities.
The calculation of stockholders’ equity is straightforward and comes directly from the fundamental accounting equation:
Assets = Liabilities + Stockholders’ Equity
Rearranging the equation gives:
Stockholders’ Equity = Assets – Liabilities
To find stockholders’ equity, you simply subtract the company’s total liabilities from its total assets.
Total assets include current and noncurrent assets such as cash, accounts receivable, inventory, property, plant, and equipment, and intangible assets. Total liabilities include current liabilities such as accounts payable, accrued expenses, and short-term debt, as well as noncurrent liabilities such as long-term debt, deferred tax liabilities, and pension obligations.
Stockholders’ equity typically includes:
- Paid-in capital: This is the capital shareholders have invested in the company. It includes common stock and preferred stock.
- Retained earnings: These are the earnings that have been reinvested in the company instead of being paid out as dividends.
- Treasury stock: This is the cost of shares that the company has repurchased from shareholders. It is a contra equity account, meaning it is subtracted from the other components of stockholders’ equity.
The formula to calculate Stockholders’ equity taking into account these components would be:
Stockholders’ Equity = Paid-in Capital + Retained Earnings – Treasury Stock
Remember, a company’s balance sheet should always balance, meaning the total assets should equal the sum of total liabilities and stockholders’ equity.
Example of How to Calculate Stockholders’ Equity
Let’s assume that you have the following information about a company from its balance sheet:
- Total Assets: $500,000
- Total Liabilities: $200,000
- Common Stock (Paid-in Capital): $50,000
- Retained Earnings: $100,000
- Treasury Stock: $20,000
To calculate the Stockholders’ Equity using the fundamental accounting equation, subtract the total liabilities from total assets:
Stockholders’ Equity = Total Assets – Total Liabilities
= $500,000 – $200,000
= $300,000
This means the stockholders’ equity of the company is $300,000 when calculated directly from total assets and total liabilities.
Now, to validate this, we can also calculate the Stockholders’ Equity from its components:
Stockholders’ Equity = Paid-in Capital + Retained Earnings – Treasury Stock
= $50,000 + $100,000 – $20,000
= $130,000
The two calculations don’t match because the figures provided in the question are hypothetical and may not comply with the fundamental accounting equation. In a real-world scenario, these numbers must align according to the accounting equation: Assets = Liabilities + Stockholders’ Equity.
Please remember, when calculating stockholders’ equity in a real-world situation, always ensure the accounting equation is balanced. In a real-world scenario, the two methods of calculating stockholders’ equity would give you the same result.
