All corporate accounting starts with this basic equation: stockholders' equity is equal to assets minus liabilities. It is the detailed breakdown of this equation that results in a company's financial reports, including the statement of stockholders' equity. Because assets play such a key role in the value of stockholders' equity, it's helpful to know exactly what an asset is and how it is reported.
Speaking loosely, an asset is anything a company owns that has monetary value. Assets include buildings, equipment, office furniture, inventory and other physical items that the company uses to perform business. Cash on hand is also an asset, as is the value of any accounts receivable -- outstanding bills on items that were sold but haven't been paid for. Assets may also include items like patents and trademarks, if these items can be assigned a real cash value.
All assets are reported on the balance sheet and income statement, and consequently fed into the statement of stockholders' equity based on their original cost, not their current value. In addition, public companies practice accrual accounting, or the practice of recognizing expenses only as they generate income. For example, if a company buys inventory of 800 widgets but only sells 600, the balance sheet will show the inventory expense of the 600 sold widgets, but not the expense for the remaining 200. Accrual accounting also means depreciation, where the cost of long-term equipment, such as a copier, is reduced over time to reflect the use of these types of assets.
Assets and SE
Assets generally make it onto the statement of stockholders' equity hidden within net income, which is the revenue for the period minus expenses. Companies recognize expenses as they generate revenue, and the expenses include the costs of physical assets, which may feel rather backward. Any change in assets increases or reduces the net income, and increases or reduces the stockholder equity.
Asset Changes Affecting SE
Acquisition of assets initially increases stockholder equity because it increases the value of total assets. Depreciation slowly decreases the value of individual assets, which then reduces stockholder equity. Cash is similar -- revenues kept as retained earnings increase stockholder equity, but revenue paid out as a dividend decreases it. The statement of stockholder equity typically lays this out in detail, noting where change occurred. But investors can also review the balance sheet, income statement, and the text portions of the financial report for further clarification.