What is Shareholders’ equity on the balance sheet

A company’s balance sheet has three major sections, assets, liabilities and stockholders’ equity or owner’s capital. Liability represents the total debt of the company and owner’s capital represents shareholders’ ownership. Liabilities and owner’s capital are the two major sources of financing the assets of a company. Total asset must equal to the total liabilities and stockholders equity in order for the balance sheet to balance.

How to Calculate stockholders’ equity

Shareholders’ equity is the net value which a company will return to its shareholders or owners if the all assets are liquidated and debts are paid. It’s also called stockholders’ equity or net worth or book value of a company.

You can use following formula to calculate shareholder’s equity or net worth or book value of the company.

Net worth or shareholders’ equity = total assets – total liabilities

To calculate, you first need to find out your target company’s total assets and total liabilities. Total assets includes all long-term and current assets such as plant, machinery, property, inventory, cash on hand and receivables owned by the company.

Total liabilities means all type of debts company owe to outsiders, the formula is long-term liabilities plus current liabilities. Liabilities includes bank loans, creditors, salaries outstanding, interest payable and other dues.

After finding total assets and liabilities, you have to subtract the later from the former.

Alternative way to calculate stockholders equity

Alternatively you can also add paid-up share capital of the company to retained earnings to get net worth. This means stockholders equity has following two components.

  • Paid-up capital
  • Retained earnings

Paid-up capital means the amount that is contributed by company’s owners to start or expand the business in exchange of shares. This is the money originally and subsequently invested in the company by its owners. It’s also called paid-in capital.

Retained earning  is the accumulated profit plus current year’s profit a business has in its balance sheet. It’s part of shareholders fund because they represent return on total stockholders’ equity which is reinvested back into the company instead of distributing to them as dividend.

For a listed company, you can find stockholders equity figure on the face of a it’s balance sheet. It should have disclosed it the financial statements with break up of retained earnings and share capital.

If you want to calculate for any other companies or organization, then use above formula.

Example

A business has total assets worth Rs. 10,00,000 and total liabilities worth Rs. 4,00,000. It has total share capital of Rs. 3,50,000 and retained earnings of Rs. 2,50,000.

By using above formula you can calculate company’s net worth as follows;

Net worth = Total Assets – Total Liabilities = Rs. 10,00,000 – Rs. 4,00,000 = Rs. 6,00,000

As discussed above, it can also be calculated by adding share capital to retained earning.

Stockholders’ equity = Share capital plus retained earnings = Rs. 3,50,000 + 2,50,000 = Rs. 6,00,000.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.