Stockholders' equity represents the value of the invested capital interest of a publicly-traded company or stockholders also known as share capital. Also known as shareholders' equity, it is one of three sections in the balance sheet, along with assets and liabilities. The stockholders' equity can be calculated in a couple of different ways. If a company pays dividends, it will be reflected in this calculation.
Accountants calculate the ending balance of stockholders' equity at the end of each accounting period before preparing a balance sheet. Calculating the ending balance only requires addition and subtraction; finding values for all of the variables that go into the calculation is the challenge and the key. You will need to know the equity from the last period, then adjust for contributions or payments and finally consider share types or retained earnings that will require further adjustments.
Find the Last Period's Equity
First, find the balance sheet for a company in order to analyze its last period's equity. Look up the ending balance of stockholders' equity from the previous period, and use this figure as your starting point. Use the ending balance from the last balance sheet as your starting point if you are dealing with your own data.
You can easily look up the most recent balance sheet of a publicly-traded company online through the Securities and Exchange Commission's EDGAR database. This database is publicly available and free of cost to access.
Adjust for Contributions, Dividends and Disbursements
After finding the ending balance for stockholders' equity from the last period, it is time to start making a few adjustments based on specific investments or payments. This is where the addition and subtraction of the calculation begins. Consider contributions to the business as well as dividend payments and disbursements made by the company.
Add onto the previous ending balance for any additional contributions made by owners or investors. If you have taken on any additional investor financing, for example, add it here. If your company is a privately held corporation, or LLC, add these amounts as well.
Subtract any amounts given out as dividends to stockholders. Dividends paid can be a major component of the stockholder's equity section during some periods, and not play into the equation at all in others. Note that a decrease in stockholders' equity for dividends paid should be paired with a decrease in cash in the assets section of the balance sheet.
Subtract any disbursements made to the company owner, partners or LLC members. Again, if these disbursements were made as repayment of loans made from company owners, do not record them here. Only record cash withdrawals made for personal profit taking. Record loan repayments to company owners by reducing the specific liability account and the cash asset account.
Read More: How to Find Dividends With Total Revenue & Expense
Account for Further Changes
Other variables may further impact the calculation outcome, such as stock type, stock balances or retained earnings. These considerations should be duly accounted for when it comes time to calculate ending stockholders' equity.
Account for changes in stock balances during the period. Add income from new common stock sales to the common stock account, and add any excess above par in a separate account. Do the same for preferred stock, taking care to always separate the two.
Account for any changes in retained earnings to arrive at an ending stockholders' equity figure. Changes in retained earnings can result from investing in company growth, making disbursements to company owners, buying back stock or other purposes.
Read More: Recording Common Stock on a Balance Sheet
David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.