How to Calculate Shareholders' Equity

Shareholders’ equity is the total payable amount to shareholders. It means if our total assets are $ 100 and our total debt liabilities are $ 30, then our equity liabilities will be $ 70. Before knowing the steps of shareholders’ equity, we should know the importance of share holders’ equity. Shareholders’ equity is helpful for knowing their value in the company.
If any investor who invest the money in any company’s shares and then sleep. After 3 years, he saw his invested $ 1000 became 1 dollar. If he knows basic accounting, he can easily find shareholders’ equity from balance sheet and minimize his risk because if he finds total shareholders’ equity has been decreased by 40%, it means his invested shares became $ 400. Now, for saving his decision, he has to sell the shares in the market as soon as possible.So, we can say shareholders’ equity is useful tool for investment decision. Its calculation must be learned by every investor.

1. Calculate Shareholders' Equity with Accounting Equation Method

We can calculate shareholders' equity with simple accounting equation formula

Shareholders' equity = Total Assets - Total Outside Debt Liabilities 

Total assets are calculating by adding both fixed and current assets. Total outside liabilities are calculated by adding both current liabilities and long term debt.

2. Calculated Shareholders' Equity with Total Capital Method

We can also calculating shareholders' equity by adding reserves and surplus in equity share capital. For example ACC Ltd. Balance sheet of Dec. 2011 shows Rs. 187.95 Crores as equity share capital and Rs. 6791.10 Crores as reserves. Now, we have to add both and it will become Rs. 6979.05 Crores. It will be shareholders' equity in Acc Ltd.

Important Points to Know :

1. If any company's net profit or net loss will change, then shareholders' equity will change.

2. If any company will change the value of any asset, then shareholders' equity will change.

3. If any outside debt liability will change, then shareholders' equity will change.

4. For calculation of shareholders' equity, we add equity share capital, preference share capital, capital surplus, retained earning, treasury stock, stock option and general reserves.

5. If company has repurchased some shares from share market, then it will be deducted from total shareholders' equity.

Related : Division of Share Capital 






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Accounting Education: How to Calculate Shareholders' Equity
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Accounting Education
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