A company's assets equals its liabilities plus stockholders' equity. This means that the stockholders own what's left over after creditors take their share of a corporation's assets Generally, stockholders want to increase their equity stake in a corporation, and there are a variety of reasons why this occurs.
Assets, Liabilities and Equity
Assets are the resources that a business owns. They can include cash, real estate, equipment, and money that's owed to it, which is know as accounts receivable. The entity's liabilities include all of the money that it owes to other parties, such as lenders or vendors. Subtracting the total liabilities from the total assets ideally leaves you with a positive number. This number is the owners' equity. In a corporation, owners' equity is called stockholders' equity or shareholders' equity. Negative stockholder equity means that the company owes more than it owns. Companies continually look for ways to increase equity, because the more equity you have, the more valuable the company is.
The pursuit of increasing stockholder equity often takes the form of attempting to increase assets. If a company can operate efficiently and increase its income more than it can increase its corresponding expenses, then total assets increase. Income, and not just revenue must increase. Revenue is a top line number, and increased revenue often results in increased expenses, which may not affect income. Companies often try to increase this profit margin by balancing cost-cutting measures with revenue-increasing strategies. When the strategy is successful, stockholder equity increases.
A business can try to increase stockholder equity by paying down its debt. When a corporation reduces what it owes to other entities, then its liabilities decrease and stockholder equity rises. Sometimes it sells an asset to reduce its liability. For example, if a company owns a building but has a mortgage on it, then the company can sell the building and pay off the mortgage. As a result, its liabilities decrease, which leads to an increase in stockholder equity. Of course, if the corporation had equity in the building, then its assets may rise after the sale.
The Balance Sheet
How assets and liabilities affect stockholders' equity is reported on a company's balance sheet, or statement of financial position. The balance sheet is just one of many important financial statements that a company uses, and reveals what stockholders own as of a certain period in time. Comparing balance sheets tells you whether or not the stockholders' equity is increasing, decreasing or staying the same. If assets are rising while liabilities fall, stay the same or don't rise as quickly, then a company either eliminated debt or increased income. If equity fell, the company may have taken on additional debt without an increase in assets.
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