Owners' equity, also referred to as shareholders' equity, indicates the net worth of a business. Equity shows ownership in the business, and is composed of money invested by owners and profits reinvested in the company from revenue generating activities. The accounting equation states that assets equal liabilities plus owners' equity. The accounting equation can be rearranged to illustrate that owners' equity equals total assets minus total liabilities. For this reason, owners' equity may be referred to as the book value of the business, as explained by the Accounting Coach website.
1. Tally all current assets. An asset is a resource controlled by the business that has a future economic value. Furthermore, a current asset is a resource that the company expects to convert into cash within a one year timeframe. Current assets consist of items like cash, accounts receivable, inventory and prepaid rent. For example, a company that has $700 in cash, $1,500 in accounts receivable and $4,000 in inventory has $6,200 in total current assets.
2. Calculate the company's total long-term assets. Long-term assets are items that the company will convert to cash in over one year. Examples of long-term assets include property, land, equipment and buildings.
3. Add total current assets with total long-term assets. The result indicates the company's total assets. For instance, a company with $6,200 in total current assets and $25,800 in total long-term assets has $32,000 in total assets.
4. Total the company's current liabilities. A liability exists as an obligation incurred by the company to pay a debt. Liabilities act as obligations against a company's resources. Current liabilities involve accounts payable, salaries payable and unearned revenue. Any liability that the company must pay within a one year period is considered a current liability. Let's assume that a company has $4,000 in accounts payable, unearned revenue of $700 and salaries payable of $2,400. In this scenario, the company has total current liabilities of $7,100.
5. Compute total long-term liabilities. Long-term liabilities may include notes payable, bonds payable, leases, mortgage payable and other debts that may become due in over one year. For instance, a company with $2,500 in bonds payable and $8,000 in notes payable has long-term liabilities totaling $10,500.
6. Add total current liabilities with total long-term liabilities. The result indicates the company's total liabilities. For example, a company with $7,100 in current liabilities and $10,500 in long-term liabilities has total liabilities of $17,600.
7. Subtract total liabilities from total assets. The result indicates the amount of equity owners have in the business. If a company has $32,000 in total assets and $17,600 in total liabilities, the owners' equity must be $14,400.
Items you will need
- List of company assets
- List of company liabilities
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