Stockholders’ equity is a concept referring to the difference between the assets and liabilities of a company. It measures the investment made and available by its partners from a net point of view, since it excludes passive and external elements. It is also known as equity, equity, or equity.
Stockholders ‘equity reflects the owners’ investment in an entity and generally consists of their contributions plus or minus their retained earnings or accumulated losses, plus other types of surpluses such as excess or insufficient accumulation of capital and donations.
Thus, according to basic accounting criteria, this concept makes up the balance sheet of an organization or company together with assets and liabilities. That is, it shows what it possesses, by itself, at a given moment.
This accounting element has the remarkable characteristic of serving as an indicator of the accounting or economic health of a company, since it shows its possible capacity to finance itself.
The distribution or reimbursement of dividends to shareholders or partners arises from this accounting partition. This responds to the existing right of the owners of a company over the net assets that it has.
The stockholders’ equity in turn is formed as an element made up of other concepts in turn, since it brings together the capital stock, reserves and other elements.
Calculation of stockholders’ equity
Its calculation resides in the difference resulting from subtracting the liabilities from the assets, resulting in a magnitude of own financing unrelated to external passive factors.
For this reason, there are other ways of calling stockholders’ equity, such as equity of a company, equity capital or equity.
This calculation, performed in an exact economic way, often also serves as an indicator of the value of a company. In other words, it gives an idea of the value of this if you discount your debts and commitments and return the resulting equity to its owners.
Composition of stockholders’ equity
The different accounting elements that make up the stockholders’ equity of a company are the following:
- Social capital, made up of the contributions made by the partners of the company.
- Capital reserves.
- Working capital, such as the resources available for daily activity. It is often identified with liquidity.
- Possible occurrences of capital accounting surpluses or losses resulting from activity.
- Appearance of dividends to be distributed between owners or partners.
- Other profits resulting from the activity of the company, whether accumulated or from the current year.
All these accounts are considered capital accounts, being a union or sum the conformation of the net capital or assets of an organization. In a basic scheme, it is usually stated that the capital contributed and the capital earned in the activity form it.