What Is a Statement of Shareholders’ Equity?
Shareholder equity, also known as stockholder equity, is a term used to describe the residual value of a company once debts have been paid to investors and shareholders. In the simplest terms, the shareholder equity equates to the value of the business's total assets minus all of its liabilities.
A statement of shareholders’ equity is provided in company balance sheets. This part of the document shows changes in the organization’s value during the accounting period. If the statement indicates that equity has increased, this is a positive sign. If equity decreases, companies may wish to look at ways to boost income or reduce liabilities.
Most businesses measure shareholder equity monthly, quarterly, or annually. The balance sheet forms an integral part of company accounts alongside the income statement and cash flow statement.
What Does Stockholders’ Equity Mean?
Stockholders’ equity is calculated using a stockholders’ equity equation. The value given in the balance sheet will either be positive or negative. A positive figure indicates that the business has sufficient assets to cover its liabilities. If the figure is negative, this suggests that the company’s liabilities exceed the value of its assets.
If the statement of shareholder equity reveals prolonged periods of negative numbers, this is a worrying sign as it implies the company might be on its way to insolvency.
When discussing shareholder equity, it’s essential to mention retained earnings, which are part of shareholder equity. Retained earnings are not the same as cash or liquid assets. These are earnings that haven’t been paid out to shareholders as dividends. If a company has retained earnings, it can use them to invest in growth or cover expenses.
Using a statement of shareholders’ equity example can help to gain a better understanding of how the statement works and what it shows. If you take the example of Business A, which has total assets of $2.5 million and liabilities of $900,000, this will give you a shareholder equity value of $1.6 million.
How To Calculate Stockholders’ Equity
To calculate stockholders’ equity, you can use this simple shareholders’ equity formula:
Shareholders’ Equity = Total Assets - Total Liabilities
The stockholders’ equity equation is also known as a balance sheet or accounting equation. To utilize this formula, you’ll need to gather the following information:
- The total assets listed on the balance sheet for the relevant accounting period
- The total liabilities listed on the balance sheet for the specific accounting period
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What Does a Statement of Shareholder Equity Comprise?
A statement of shareholders’ equity is part of the balance sheet. It contains a number of key components, which provide critical information about the value of the company during the accounting period. In most cases, the statement of shareholders’ equity includes:
Preferred stock is a stock or ownership stake that offers shareholders access to a higher claim on the company assets. Preferred stockholders receive preferential treatment over common stockholders, including early access to dividends. Usually, preferred stock is listed on the statement at face value. If you hold preferred stock, you don’t have voting rights in the company that issues the shares.
Common stock is a share or stake in the company, which is considered to be lower down the pecking order than preferred stock. However, unlike preferred stockholders, common stockholders do usually have voting rights. Common stock is listed at face value.
Learn more about common stocks in our dedicated guide.
Treasury stock is stock that the company itself purchases. A business may decide to purchase shares to boost the share price or lower the risk of a takeover, for example. Most commonly, treasury stock is held by public companies. If a business has treasury stock, the shareholders’ equity will decrease by the amount of money used to purchase the stock.
As mentioned, retained earnings are commonly used to reinvest in the business. They are net profits that are not paid out in dividends. A company may use retained earnings to buy new equipment or technology or fund research and development projects, for example.
Additional Paid-Up Capital
Additional paid-up capital, also known as contributed capital, is the amount of extra money investors pay to buy new shares in the business. This stock is bought at prices that exceed face value. The price will decrease if the company buys its own shares.
Unrealized Gains and Losses
Unrealized gains and losses reflect gains and losses that are linked to changes in the value of the company’s investments. Unrealized gains occur when a business investment gains value, and the capital hasn’t yet been cashed in. Unrealized losses occur when an investment loses value and hasn’t yet been sold or unloaded.
How To Create a Statement of Shareholders’ Equity
Creating a statement of shareholders’ equity usually involves drawing up four sections: Equity, New equity infusions, Subtractions, and Equity balance.
- Equity: This section reveals the equity of the business at the beginning of the accounting period.
- New equity infusions: This section covers new investments made during the accounting period and net income.
- Subtractions: This section lists dividends paid out to shareholders and net losses.
- Equity balance: This section provides the equity balance at the end of the accounting period.
Your company’s statement of shareholder equity should also contain the name of the organization, the dates of the accounting period, and the title of the statement.
Benefits of a Statement of Shareholders’ Equity
There are several ways you can use a statement of shareholders’ equity. In particular, it aids:
- Financial decision-making
One of the most significant advantages of using a statement of shareholders’ equity is enabling business owners to make well-informed decisions. Using a total stockholders’ equity formula gives you an accurate insight into how well the company is performing and provides valuable information for financial planning, budgeting, and investing.
By using your statement, you can determine whether it’s a good time to invest in growth, push sales to maximize profits or reduce expenses to lower your total liabilities. Financial planning is crucial for businesses, particularly those that have a limited budget and those looking to expand.
- Monitoring business management
Shareholder equity is an accurate gauge of how well businesses are run. Decreasing stockholder equity may indicate that the company could be managed better. Low figures may prompt changes.
- Navigating challenging periods
Many businesses all over the world have found the last two years challenging. If times are tough and it’s difficult to generate profits, the statement of shareholder equity can provide information to help business owners determine whether they have sufficient equity to get through quiet or uncertain periods. It can also help directors to make decisions about whether they have the stability to borrow money or whether it’s a good time to consider selling.
What is on the statement of shareholders’ equity?
The statement of shareholder’s equity provides information about the value of a company once its debts and liabilities have been paid. The statement contains information about the company, the accounting period, and the type of stock. Typically, you would expect to find the following components on a statement of shareholders’ equity: preferred stock, common stock, treasury stock, contributed capital, retained earnings, and unrealized gains and losses.
How do you prepare a statement of shareholders’ equity?
To prepare a statement of shareholders’ equity, you’ll need to ascertain the total assets and the total liabilities on your balance sheet. The statement will cover the equity at the beginning of the accounting period, new investments, subtractions through dividends and losses, and the final equity value at the end of the accounting period.
What is the purpose of shareholders’ equity?
Shareholder equity statements provide useful information about the value of a company once investors and shareholders have been paid. Shareholder equity statements can help business owners to make decisions related to financial planning, selling the company, cutting expenses, and reinvesting.
What are the two major sections of a statement of stockholders’ equity?
A statement of stockholders’ equity covers a company’s total assets and total liabilities. Within the statement, it’s common to find a series of components, including preferred, common, and treasury stock, contributed capital, unrealized gains and losses, and retained earnings. Shareholder equity is calculated by subtracting the company’s total liabilities from the total value of its assets.
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