Shareholders’ equity is the term used to indicate ownership in an incorporated business. The term is also used interchangeably with the “book value” of a business, according to the Accounting Coach website. Shareholders’ equity represents the amount that owners of the company would receive after all debts are paid and assets liquidated. Shareholders’ equity can be calculated by subtracting total liabilities from total assets.
Add all company assets. An asset is a resource controlled by a company that has future economic value. Add current assets such as cash, accounts receivable and inventory. These items are referred to as "current assets" because the company expects to convert them to cash within one year. Add long-term assets such as patents, buildings, equipment and notes receivable, which the company does not expect to convert to cash during the next 12 months. Add current assets and long-term assets to determine the company’s total assets.
Add all liabilities. Liabilities are debts incurred that place an obligation on the company’s resources. Add current liabilities, consisting of accounts payable and other short-term debts the company expects to pay within one year. Add long-term liabilities such as notes and bonds payable. Add current liabilities and long-term liabilities to arrive at the company’s total liabilities.
Subtract total liabilities from total assets to find the shareholders’ equity in the business. For example, if a company has $100,000 in total assets and $50,000 in liabilities, the shareholders’ equity is $50,000.
Items you will need
- Balance Sheet
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