First and foremost, what does shareholder equity mean? Shareholder equity refers to the value of a company’s assets that remain after deducting the firm’s liabilities. You should work with a professional accountant to get an accurate shareholder equity statement.
The shareholder’s equity is the amount of money that will remain after a company sells all its assets and pays off all its debts. It shows the quality of a company’s economic stability. It helps provide insights regarding the capital structure of a business. Preparing and analyzing a company’s financial data requires skills and experience, it is best to consult with an accountant before proceeding with any financial decisions for your company.
You can learn more about the financial health of your business by understanding the shareholder equity balance sheet.
How Does the Shareholder Equity Balance Sheet Work?
There are three sources of shareholder equity. Knowing these sources will help you understand where the amount on the equity balance sheet is from.
- Capital Stock
This source refers to cash and other assets that investors pay to raise the company capital. Capital stocks are exchanged for issuing shares of common stock or preferred stock.
- Paid-In Surplus
This source refers to the capital contributed by investors in exchange for stocks. However, this does not include stock from earnings or donations.
- Retained Earnings
This source refers to accumulated profits that the business has for reinvestment in the firm. Retained earnings are not paid out to shareholders as dividends or used in repurchasing stocks.
Reading a Shareholder Equity Balance Sheet
Equity balance sheets for businesses often have two columns: one for listing company assets, and a column listing liabilities and owner’s equity. The format depends on the accountant or the owner’s preference.
Usually, the assets are listed on the left column, then the liabilities and owner’s equity are listed on the right. However, some balance sheets will list the company assets at the top followed by the liabilities, and finally– the shareholder equity at the bottom.
Regardless of the format, the assets should be equal to the total liabilities plus the owner’s equity.
The shareholder equity balance sheet provides a snapshot that will tell you about the business assets, liabilities, and owner’s equity at the end of a reporting period.
Keep in mind that the shareholder’s equity will be adjusted on the balance sheet for a number of items. For instance, a balance sheet has a section for “other comprehensive income”. This section is for revenues, expenses, gains, and losses that are not included in net income yet.
The shareholder equity increases whenever the business generates or retains earnings. It helps balance debts and manages unexpected losses. The equity serves as an s cushion and offers more flexibility to recover in case the business experiences surprise losses or expenses.
If your business has lower shareholder equity, it means that you need to reduce your liabilities. However, this is not always the case. For instance, if your business is new or if you have low expenses– then lower equity should not be a big issue.
The Key Takeaways
Now that you have a better idea of what shareholder equity is and how to find it on the balance sheet– you should be able to make better business decisions in the future.
Keep in mind that shareholder equity is the value of your company’s assets that will remain after deducting liabilities. You can find this amount on your business balance sheet. You can also check this on the statement of stockholder’s equity that your accountant has prepared.
There are cases when higher shareholder equity indicates stable finances and better flexibility, but keep in mind that each business is built differently. If you are just starting out or if you do not have many expenses to start with– then lower shareholder equity should not be a big issue.
You should work with a professional accountant or understand shareholder equity better so that you can understand your company’s financial health better. It will also help you learn what to expect from other companies as an investor.