A common formula that is used to calculate stockholders’ equity requires subtracting total liabilities from total assets of a company. Here, total liabilities are the debts of a company, and total assets represent total value of an entity.
Explanation:
In accounting, the calculation of stockholders’ equity is an important constituent of a company’s financial stability. The statement of shareholders’ equity includes such important parameters as assets and liabilities. These elements are basic financial determinants that help to analyze the value of the company and its performance using the investments. If the sum of total liabilities and equity equals total assets, then the financial situation inside the company is balanced. In order to find stockholders’ equity, a simple equation is used, which is the following:
Assets – Liabilities = Equity.
This formula requires subtracting the money that a company owes in the form of payments or taxes from the total financial value of the entity.
Another way of calculating equity is to add money earned from common and prefered stock to retained earnings and subtract treasury stock. The equation might be illustrated as the following:
Earnings from common and preferred stock + Retained earnings – Treasury stock = Shareholders’ Equity
In this formula, retained earnings represent the money an entity has preserved from prior profits and has not spent on dividends for shareholders. This money is kept for the purpose of reinvestment into business in the future. Treasury stock is the cost of shares that the entity bought from investors. Thus, all these components influence stockholders’ equity and ultimately define the financial stability of an organization as presented in its balance sheet.