Stockholder equity constitutes the book value of a company, or the worth of a business on paper. Companies calculate stockholder equity through a simple mathematical formula that includes the assets of a business and its liabilities. The answer to the question of which assets a company uses in calculating stockholder equity proves relatively simple on first glance but requires a brief examination of some of the finer points of determining equity value.
Stockholder equity, also known as owner's equity and shareholder's equity, constitutes the debt a company owes its owners. A company may calculate stockholder equity for individual owners, though usually it only does so for its owners as a whole. Any person who owns stock in a company qualifies as a part owner in that company and holds equity. Thus stockholder equity equals the amount of money a company must pay out to all its owners to buy back all shares of active stock.
Components of Stockholder's Equity
One basic component figures in stockholder equity: assets. Assets constitute all the things a company owns with any value, from physical property such as office space, warehouses and even company cars and computers, to copyrights, trademarks, cash and claims against others who owe the company money. When calculating stockholder equity, a company considers all of its assets, because every owner of a company theoretically invests a portion of his interest in the company in each of the company's assets.
Calculating Stockholder Equity
Calculating stockholder equity entails the use of a very basic mathematical formula. Simply, stockholder equity = assets -- liabilities. In this context, liabilities include all the money a company owes, which includes short-term liabilities such as credit and long-term liabilities such as loans. When calculating stockholder equity, a company deducts the value of liabilities from the value of total assets because stockholders are not legally beholden to liabitlies. Upon determining overall stockholder equity, a company determines individual stockholder equity by calculating the value of individual shares. This process requires subtracting the worth of all shares bought from shareholders by the company from the total value of stockholder equity. Shares bought from holders by the company decrease the value stockholder equity as it decreases total capital invested by third party owners.
Statement of Stockholder's Equity
A statement of stockholder equity, calculated considering all the assets owned by a company, generally exits in the form of chart. Companies publish such charts each year, at the end of the year, as a summary of current stockholder equity and the annual change in stockholder equity. This chart displays the total number of shares in existence, the value of each share and the total value of all shares. Charts also include the change in value of every share during the course of the year and the total value of company assets at the start and end of the year in question. Public companies must make such information public.
- Accounting Coach; Owner's Equity; Harold Averkamp
- Accounting Coach; Stockholder's Equity; Harold Averkamp
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- "Financial Management: Theory and Practice"; Eugene F. Brigham, et al.; 2011
- Business Dictionary: Assets
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