Stockholders' equity - What is stockholders' equity?
Definition: Stockholders' equity is the residual claim of the owners in assets after all liabilities are paid.
When the owners of a business are stockholders, this is referred to as stockholders' equity.
The Stockholders' Equity Section
This section appears in the Balance Sheet, usually below the assets and liabilities sections.
The balance sheet is displayed in this way in order to show the fundamental accounting equation:
Assets = Liabilities + Stockholders' Equity
How Stockholders' Equity is created
As any business gets ready to launch, owners must put funding into the business to finance assets. This is also known as contributed capital.
In other words this is a liability that the business must pay back to the owners in the event of a bankruptcy, but only if all creditors are paid off first.
If there aren't enough assets to cover creditors, owners will not receive anything back, as the shareholders' equity account will be reduced to zero. This is why this type of ownership is also known as risk capital.