Is shareholders equity a liability or asset?
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Overview And Definition
Shareholder’s equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity.
For example – retained earnings, common stock, etc.
Liabilities
Liabilities are the obligation or something a company or a person owes to another party. normally it is in cash form but it can be in other forms also.
And these liabilities need to be settled as per the terms agreed upon by the party.
For example – taxes owned, trade payables, etc.
Assets
Assets are those which has ownership of a company and controlling power with the company. In other words, Or something which will generate profits today and in the future.
For example – cash, building, etc.
Conclusion
Therefore I can conclude that stockholders’ equity refers to the assets remaining in a business once all liabilities have been settled, or I can say as it is not the same thing as the company’s assets. Assets are what the business owns.
How to Calculate Shareholders’ Equity
Shareholders’ equity is the owner’s claim when assets are liquidated, and debts are paid up. It can be calculated using the following two formulas:
Formula 1:
Shareholders’ Equity = Total Assets – Total Liabilities
Formula 2:
Shareholders’ Equity = Share Capital + Retained Earnings – Treasury Stock
Let me now take the example of a small business owner who is into the business of chairs in India.
As per the balance sheet of the proprietorship firm for the financial year ending on March 31, YYYY, the following information is available. Determine the shareholders’ equity of the firm.
Given, Total Assets = Net property, plant & equipment + Warehouse premises + Accounts Receivable + Inventory
= Rs (1000,000 + 300,000 + 500,000 + 800,000)
Total Assets = Rs 2600,000
Again, Total liabilities = Net debt+ Accounts payable + Other current liabilities
= Rs (700,000 + 700,000 + 600,000)
Total Liabilities = Rs 2,000,000
Therefore, the shareholders’ equity of the firm as on March 31, YYYY, can be calculated as,
= Rs (2600,000 – 2,000,000)
Shareholders’ Equity = Rs 600,000
Therefore, the shareholders’ equity, as of March 31, YYYY, stood at Rs 600,000.