How to Calculate Average Liability Plus Equity

by Bryan Keythman

A company's balance sheet shows its assets, liabilities and stockholders' equity at the end of an accounting period. Assets must equal liabilities plus stockholders' equity on a balance sheet in order for the balance sheet to balance. Because a balance sheet shows account balances only at the end of the period, you must calculate the average liabilities plus stockholders' equity to estimate the amount of liabilities and stockholders' equity the company held during the accounting period. A greater amount of average liabilities and stockholders' equity means a company has more assets to use in its business.

Find a company's total liabilities and its total stockholders' equity on its most recent balance sheet and on its previous period's balance sheet. You can find a company's balance sheet in its quarterly and annual reports, which you can obtain from the "investor relations" section of its website. For example, assume a company's most recent balance sheet shows $100,000 in total liabilities and $200,000 in total stockholders' equity, and assume its previous period's balance sheet shows $80,000 in total liabilities and $120,000 in total stockholders' equity.

Add each period's total liabilities to its total stockholders' equity to calculate total liabilities and stockholders' equity for each period. In this example, calculate $100,000 plus $200,000 to get $300,000 in total liabilities and stockholders' equity for the most recent period. Calculate $80,000 plus $120,000 to get $200,000 in total liabilities and stockholders' equity for the previous period.

Calculate the sum of total liabilities and stockholders' equity from both periods. In this example, add $200,000 and $300,000 to get $500,000.

Divide your result by 2 to calculate the average liabilities and stockholders' equity for the accounting period. In this example, divide $500,000 by 2 to get $250,000 in average liabilities and stockholders' equity. This means the company held approximately $250,000 in average liabilities and stockholders' equity at any given time during the accounting period.

Tip

  • Monitor a company's average liabilities and stockholders' equity over time. A growing company will typically increase this amount over time as it generates profits and reinvests in its business.

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