Stockholders’ equity, also known as shareholders' equity, represents the value of each stockholder’s ownership or share of a given company. As a business, it’s important to highlight these amounts and their changes throughout a given period of time — typically from the beginning to the end of the year. To do so, you should create a stockholders’ equity statement, which is a financial document that outlines your total capital per shareholder.
Privately owned companies do not always have stockholders, so if your private business has never sold any equity shares, you won’t have to create a stockholders’ equity statement. However, if you are publicly owned (or if your private company has investors with equity in the business), you’ll want to understand what goes into creating this document so you can ensure you’re including the right information.
Our guide will both define and explain the components of a stockholders’ equity statement.
What is stockholders' equity?
The Corporate Finance Institute explains that the stockholders’ equity statement is part of a company’s balance sheet, consisting of share capital and retained earnings, or assets minus liabilities. The document breaks down the value of stockholders’ ownership interest in a company during a specific accounting period, typically measuring any changes from the beginning to the end of the year.
[For a full guide on tracking business financials, see: The Key Statements of Financial Reporting.]
This helps companies better understand how their investments are performing, and if any changes should be made to spark an increase. It will also help you attract potential investors to your business, especially if your balance continues to rise at a steady rate. Because shareholders’ equity experiences frequently change, however, it is crucial to review this information on a regular basis so you understand how to adapt and move forward.
There is much to consider when creating a stockholders’ equity statement, like different types of stock and any additional gains or losses.
What information goes on a statement of stockholders' equity?
There is much to consider when creating a stockholders’ equity statement, like different types of stock and any additional gains or losses. While calculating these amounts, you’ll want to ensure not to leave any of these details out of the equation.
Most stockholders’ equity statements include the following components:
- Preferred stock, which provides a higher claim on company earnings and assets and often entitles its holders to dividends before common stockholders.
- Common stock, which entitles holders to voting rights within the corporation, but places them at a lower priority than bondholders and preferred stockholders when divvying up equity holder payments in the event of liquidation.
- Treasury stock, which is repurchased by the issuing company for purposes like avoiding takeovers and boosting stock prices.
- Additional paid-up capital, or contributed capital, which is the amount investors pay over their par value.
- Retained earnings, which is the total amount earned by the company not divvied up to stockholders, and often reinvested in the business itself.
- Unrealized gains and losses, which are gains or losses from an investment that changed in pricing.
Once you define and outline this information, you’ll better understand your company’s financial wellbeing and performance, and how investors are viewing your potential. From there, you might decide to sell additional shares, streamline circulation of shares or plan the distribution of profits.
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