Debitoor Dictionary

Accounting terms explained in a simple way

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  1. Assets
  2. Balance sheet
  3. Capital
  4. Credit
  5. Dividends
  6. Liabilities

Stockholders' equity - What is stockholders' equity?

Stockholders' equity is the total amount of capital given to a company by its shareholders in exchange for stock, plus any donated capital or retained earnings.

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In other words, stockholders' equity is the total amount of assets that the investors will own once debts and liabilities are paid off.

Stockholder and shareholder are synonymous, therefore stockholders' equity may also be referred to as shareholders’ equity. However, stockholders' equity is only applicable to corporations who sell shares on the stock market. The corresponding concepts are owner's equity for sole traders and partners’ equity for partnerships.

Stockholders’ equity on the balance sheet

Shareholders' equity should be reported at the end of each accounting period under the equity section of the balance sheet. The amount of stockholders' equity is recorded on the balance sheet in a number of accounts:

  • Share capital – the amount received when stockholders purchased shares. This is usually broken down into two separate accounts: common stock and paid-in capital in excess of par (PIC). Common stock records the stated value of outstanding shares, whereas PIC records the amount investors were willing to pay for shares over their stated price.
  • Retained earnings – the cumulative earnings of the business, minus any dividends paid to shareholders.
  • Treasury stock – the amount spent by the corporation to buy back shares from its investors. Because the account balance is negative, this offsets the other shareholders' equity account balances..

How to calculate stockholders’ equity

There are two calculations for stockholders' equity:

Stockholders' equity = total assets - total liabilities, or

Stockholders' equity = share capital + retained earnings – treasury shares

For example, a business has total assets worth £1000,000 and total liabilites worth £400,000. The business has share capital worth £350,000, retained earnings of £250,000, but no treasury shares.

The stockholders' equity is therefore £600,000: either 1,000,000 - 400,000 or 250,000 + 350,000. Because the business has no treasury shares, this amount is not included in the equation.