Owners' equity tells the owners of a company how much their investment in the company is worth. If a company sells stock, the dividends the company pays out to stockholders lowers owners' equity. In addition, stockholders use a special measure called stockholders' equity to help determine how much their investment in a company is worth.
Ending equity is the difference in equity from the beginning of the reporting period to the end of the reporting period. Corporations can calculate the ending equity by adding investment income to the beginning equity, subtracting any dividends paid to stockholders and adding revenue that came into the business through transactions. If the ending equity is positive, the business is worth more than it was at the beginning of the reporting period, which indicates financial growth.
The stockholders equity is the value each stockholder retains from the company. This measure of equity doesn't depend on the current price that the company is selling stock for. Instead, it is based on the price the stockholders originally paid for the stock and the stock's par value. Thus, if stockholders bought stock at a lower price than it is currently being offered for, they may have more equity in the company.
Calculating Stockholders' Equity
To calculate stockholders' equity, accountants add the total number of common shares outstanding to the premium on common stock. The premium is calculated by subtracting the par value of the shares from their issue price. The accountant then adds the par value of preferred shares and the premium of preferred shares. Finally, the accountant adds the total retained earnings in the company to the total.
Ending equity is a measure of the retained earnings in a company -- how much of the company's revenue is invested in the company, as opposed to being used to pay expenses outside of the company. Accountants must determine the ending equity first, as the stockholders' equity includes the total retained earnings for the reporting period.