Statement of Stockholders Equity – Formula, Example

Statement of Stockholders Equity – Stockholder’s equity or Shareholders Equity appears in the balance sheet of a company made of share capital and the statement of shareholders’ equity is the section of the balance sheet that shows the changes in the value of the business to shareholders.

Statement of Stockholders Equity

The statement of stockholder’s equity is the difference between total assets and liabilities. It is usually measured monthly, quarterly, or annually. There is three important documents income statement; cash flow statement and the state of stock holder’s equity are the important statements.

Statement of Stockholders Equity - Formula, Example

Stockholder’s equity increases if more capital is contributed by business owners or investors or due to an increase in profits.

How to calculate shareholder’s equity?

Shareholder’s equity is calculated by deducting total liabilities from the total assets.

Total Assets

The total assets are categorized as current and non-current assets. Current assets can be converted into cash within one year. Non-current or long-term assets cannot be converted into cash within a year.

Total Liabilities

The total liabilities mean current liabilities and long-term liabilities. Current liabilities have to be within a year. The long-term liabilities are due for repayment beyond one year.

What does negative or positive shareholder equity mean?

The shareholder’s equity may be positive or negative. The positive equity means that the company has surplus assets to its total liabilities. Whereas the negative SE means the liabilities of the company exceed its assets. If it continues for a long period the company can lead to insolvency of the balance sheet.

No investor likes to invest in a company that has negative shareholder equity. That’s why SE is one of the important components that attract investors to invest in the company.

Why do the companies need a statement of shareholder equity?

We are living in the era of competition a small business needs to know whether its business is doing well or not. In the absence of a shareholder’s equity statement, it’s hard to do so. So this statement is a valuable tool to measure the health of your business. Here are the uses of the shareholder’s equity statement.

  • Helps you to take financial decisions

Lists how a business is after paying all the expenses is valuable for future planning. After watching the statement you will come to know do you need to borrow money to expand the business or not.

Is there any need to cut the cost or you will earn a profit on the sale?  It also attracts outside investors who want to see your financial position before investing in your business.

  • How a business is doing

The statement of shareholder’s equity is a useful tool to measure how well a business is doing. If the equity declines from one accounting period to another is a sign that a business is doing something wrong.

  • Helps to overcome financial difficulties

The shareholder’s equity is vital in trying times. In case you didn’t make enough to continue operations. It lets you know whether you have enough equity in the business.

What are Equity Shares?

Equity shares are the long-term source for a company. These shares are issued to the general public and cannot be redeemed. The equity shareholder has the right to vote, claim the assets, and share the profits.

Types of the Equity Shares

  • Ordinary Shares

The shares are issued by a company to procure funds to meet the long-term expenses of a business. These shares are associated with the ownership benefits provided to an investor where an individual gains exposure to various management activities. An investor who is having a large number of ordinary shares has substantial voting rights.

  • Preference Equity Shares

These shares are issued with a guarantee of the payment of cumulative dividends before returns are distributed to an ordinary shareholder. A preference shareholder does not have any right which is provided on common shares. Preference shares can be classified into two categories.

  • Participating

The investor having participating preference equity shares are entitled to the stipulated amount of profits, and bonus, depending on the performance of the company.

  • Non-Participating

These equity shares are not legible for such benefits.

  • Bonus Shares

The shares issued out of retained earnings are known as bonus shares. The profits are distributed among investors in the form of additional shares. A bonus share cannot increase the total market capitalization value of the company. It only represents the excess capitalization of excess funds generated from production.

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