Shareholders’ equity is the term used to indicate ownership in an incorporated business. The term is also used interchangeably with the “book value” of a business, according to the Accounting Coach website. Shareholders’ equity represents the amount that owners of the company would receive after all debts are paid and assets liquidated. Shareholders’ equity can be calculated by subtracting total liabilities from total assets.
The first step in figuring out the shareholders' equity in a certain company, is first adding all company assets together. An asset is a resource controlled by a company that has future economic value when sold or liquidated. These current assets can include things such as cash, accounts receivable and inventory. These items are referred to as "current assets" because the company expects to convert them to cash within one year. You will also add in all long-term assets such as patents, buildings, equipment and notes receivable, which the company does not expect to convert to cash during the next 12 months. Combine both current assets and long-term assets to determine the company’s total assets.
Next, you must determine all of the company's liabilities. Liabilities are debts incurred that place an obligation on the company’s financial resources. Liabilities are unpaid accounts, lines of credit, loans or anything else that can or does cost the company money. Take these current liabilities, consisting of accounts payable and other short-term debts the company expects to pay within one year and total them. Then, add in the company's long-term liabilities such as notes and bonds payable. Add current liabilities and long-term liabilities to arrive at the company’s total liabilities.
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Lastly, you will need to subtract the company's total liabilities from the company's total assets to find the shareholders’ equity in the business. For example, if a company has $100,000 in total assets and $50,000 in liabilities, the shareholders’ equity is $50,000. This figure is the company's net worth. If the company were to liquidate all assets, the shareholders' equity is the amount left in the company after all debts and bills are paid, and after all assets are taken into account. It is also possible to end up with negative shareholders' equity, but this scenario should be a huge red flag for potential investors as this could mean that the stockholders owe money, and that the company is not worth the risk of investing in.
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