Definition of Shareholders Equity
Shareholders equity is the difference between total assets and total liabilities. It is also the Share capital retained in the company in addition to the retained earnings minus the treasury shares. Shareholders equity is the amount that shows how the company has been financed with the help of common shares and preferred shares. Shareholders equity is also called Share Capital, Stockholder’s Equity or Net worth.
There are two important sources from which you can get shareholder’s equity. The first source is the money originally invested in the company and all the other investments that are made in the company after the initial payment and the second source is the earnings that the company has retained over a period of time through its operations.
Formula to calculate Shareholders Equity
The shareholders Equity can be calculated with the help of the following formulas:
Shareholders Equity = Total Assets – Total Liabilities
Shareholders Equity = Share Capital + Retained Earnings – Treasury Shares
The first formula involving total assets and total liabilities is relatively easy to use, and is considered as a basic accounting equation. The first formula is the difference of the total assets and the total liabilities. To determine total assets you need to add long term assets and current assets. Current assets are the receivables and cash of the company and long term assets is the value of the capital assets and property. All of these should be held by the company for a year at least.
Then you have to compute total liabilities, you need to add current liabilities and long term liabilities. This would provide an instant investment decision you would have to take. It is one of the quickest ways to shareholder equity.
The other formula which makes use of the share capital and retained earnings which are deducted from the treasury shares. This is called the Investor’s equation where you have to compute the share capital of the company and then ascertain the retained earnings of the business.
Verify the retained earnings for the business. Retained earnings are the profits made by the company. Then you need to find out the amount of treasury shares of the company, which are the shares the company sells and the repurchases.
Shareholder’s equity can be calculated by adding share capital to retained earnings and subtracted by treasury shares. Thus shareholder’s equity can be ascertained by a company by two easy methods.