Definition: Stockholder’s equity, also called shareholder’s equity or corporate capital, consists of the paid-in capital and retained earnings of a corporation and equals the amount of assets the shareholders own outright. In other words, this is the amount of assets that the investors own after all of the debts are paid off.
What Does Stockholder’s Equity Mean?
Stockholder’s equity is made up of two main parts: paid in capital and retained earnings. Paid-in capital is the total amount of money the corporation received from investors for their shares of stock. Paid in capital is often broken down into two different accounts: common stock and paid-in capital in excess of par. The common stock account typically reports the par or stated value of outstanding shares while the PIC in excess of par shows the amount investors were willing to pay for shares over their stated price.
Retained earnings are the profits that the company has accumulated over time. Each year the company makes a profit and doesn’t distribute the cash to the investors, it accumulates in the retained earnings account. You can think of this account like the amount of money investors left in the company after all of the expenses were paid.
Many people refer to the equity section of the balance sheet as the net assets of the company because it represents the amount of assets that are left over after all of the liabilities are repaid. By moving around the accounting equation (assets = liabilities + owner’s equity) we can see that the equity section equals the difference between the assets and liabilities (assets – liabilities = owner’s equity).
Total stockholder’s equity is reported in the equity section of the balance sheet at the end of each period. It is also computed on the statement of shareholder’s equity by using the following equation:
- Beginning balance
- Net income
- Issuance of stock
- Ending balance