Stockholders’ equity or shareholders’ equity, is the remaining amount of assets after all liabilities have been paid.
Stockholders’ equity is useful as it is a means of judging the funds retained within a business. For instance, if it is a negative, it may indicate an oncoming bankruptcy.
Formula to calculate stockholders’ equity.
An asset is a resource with economic value that an individual or country owns or controls with the expectation that it will provide a future benefit.
A liability is something a person or company owes, usually a sum of money.
Example:
At the end of a financial year, a company recorded total assets worth Sh. 80 Million. The company’s total liabilities in that year was Sh. 85 Million. Calculate the shareholders equity.
Therefore, the stockholders’ equity is a negative of Sh. 5 Million. This shows that if the company’s management don’t come up with a way to either increase the assets or decrease the liabilities, the company could go bankrupt.
