Stockholders' equity represents the value of the invested interest of a publicly company's or stockholders. Stockholders' equity, also known as shareholders' equity, is one of three sections in the balance sheet, along with assets and liabilities. Accountants calculate the ending balance of stockholders' equity at the end of each accounting period before preparing a balance sheet. Calculating the ending balance only requires addition and subtraction; finding values for all of the variables that go into the calculation is the challenge and the key.
1. Look up the ending balance of stockholders' equity from the previous period, and use this figure as your starting point. Use the ending balance from the last balance sheet as your starting point if you are dealing with your own data. You can look up the most recent balance sheet of a publicly traded company online through the Securities and Exchange Commission's EDGAR database.
2. Add onto the previous ending balance for any additional contributions made by owners or investors. If you have taken on any additional investor financing, for example, add it here. If your company is a privately held corporation, or LLC, add these amounts as well.
3. Subtract any amounts given out as dividends to stockholders. Dividends paid can be a major component of the stockholder's equity section during some periods, and not play into the equation at all in others. Note that a decrease in stockholders' equity for dividends paid should be paired with a decrease in cash in the assets section of the balance sheet.
4. Subtract any disbursements made to the company owner, partners or LLC members. Again, if these disbursements were made as repayment of loans made from company owners, do not record them here. Only record cash withdrawals made for personal profit taking. Record loan repayments to company owners by reducing the specific liability account and the cash asset account.
5. Account for changes in stock balances during the period. Add income from new common stock sales to the common stock account, and add any excess above par in a separate account. Do the same for preferred stock, taking care to always separate the two.
6. Account for any changes in retained earnings to arrive at an ending stockholders' equity figure. Changes in retained earnings can result from investing in company growth, making disbursements to company owners, buying back stock or other purposes.
- Jupiterimages/Photos.com/Getty Images