How to Find Stockholders Equity on a Balance Sheet
Assess a company's financial foundation by learning how to read the balance sheet. This guide explains how to locate and interpret stockholders' equity.
A company’s balance sheet provides a financial snapshot detailing its assets, liabilities, and ownership stake. One of the three primary sections is stockholders’ equity, sometimes called shareholders’ equity. This figure represents the company’s net worth, which is the amount that would be returned to shareholders if all assets were sold and all debts were paid off.
The Accounting Equation
The structure of a balance sheet is governed by the accounting equation: Assets = Liabilities + Stockholders’ Equity. This formula ensures the balance sheet always remains in balance. Assets are resources a company owns, like cash and equipment, while liabilities are its financial obligations, like loans.
By rearranging the formula, you can calculate stockholders’ equity as: Stockholders’ Equity = Assets – Liabilities. For instance, if a company has total assets of $150,000 and total liabilities of $90,000, its stockholders’ equity is $60,000.
Locating the Stockholders Equity Section
A balance sheet lists a company’s assets first, followed by its liabilities. The stockholders’ equity section is located in the bottom half of the balance sheet, directly following the “Total Liabilities” line.
It will be clearly labeled as “Stockholders’ Equity” or “Shareholders’ Equity.” This placement reinforces the accounting equation, as the sum of liabilities and stockholders’ equity equals the total assets listed in the top half.
Components of Stockholders Equity
The stockholders’ equity section contains several line items that provide a detailed breakdown, including:
- Paid-in capital, which includes common stock and additional paid-in capital, represents the money directly invested by shareholders in exchange for ownership shares. The common stock account is often recorded at a nominal “par value,” while any amount paid by investors above this value is recorded as additional paid-in capital.
- Retained earnings represent the cumulative net income a company has generated over its lifetime, less any dividends it has paid out to shareholders. These are profits that are reinvested back into the business, and a consistent increase in retained earnings generally signals sustained profitability.
- A company may also report treasury stock, which consists of shares the company has repurchased from the open market. This account is shown as a deduction from total stockholders’ equity because it represents a reduction in the number of shares held by the public.
- Accumulated Other Comprehensive Income (AOCI) includes unrealized gains and losses on certain investments that are not yet reported on the income statement.