Shareholders Equity Meaning – Definition, Formula, Importance

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shareholders equity meaning

Shareholders Equity Meaning and Example

Shareholders Equity Meaning – It refers to the extent of net assets belongs to the owners of the company, In simple words, it is total assets minus total liabilities. Analyst use it to determine the financial performance of the organization.

It is also the sum of share capital and retained earnings minus treasury shares. The other names of shareholder’s equity is share capital, stock holder’s equity or Net worth. So there are two sources of share capital. First is the initial capital and the investment during the operations of the firm. Second source is the a part of profit that company keeps with itself instead for distributing as dividends.

It also reflects that amount of money which needs to be refunded when organization goes on a liquidation process. The Shareholders equity formula is given below –

Shareholder’s Equity formula

Shareholder Equity = Total Assets – Total Liabilities

Or

Shareholder Equity = Share Capital + Retained Earnings – Treasury Shares

The first formula is quite simple. In order to determine total assets, sum long – term assets and current assets. On the other hand, to get liabilities, sum long term liabilities with current liabilities.

The second formula requires the determination of share capital and the retained earnings. The portion of profit that organization doesn’t distribute is retained earnings. Treasury shares involves the money from selling and repurchasing of company shares.

Shareholders Equity Example

To understand shareholder equity meaning more clearly, let’s do a example. ABC Ltd. Balance Sheet shows various balances in Rupees as on 31st March 2016 –

Stocks – 10,00,000
Total Assets – 5,00,000
Retained earnings – 12,00,000
Total liabilities – 3,00,000

Therefore, shareholder’s equity = 5,00,000 – 3,00,000

= 2,00,000

What Includes in Shareholders Equity?

  1. Preference Share capital
  2. Equity Share Capital
  3. Paid – up capital
  4. Retained earnings
  5. Common stocks in treasury

Related Financial Terms of Shareholders Equity

Importance of Shareholders Equity

The statement of stock holder’s equity is very important from the investors point of view. As it shows the variations or changes that comes in the capital structure of the organization. In addition to this, this statement also represents the net worth of a company.

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