Shareholders’ equity is the amount left over when you subtract a company’s liabilities from its assets. The statement of shareholders’ equity, also called a statement of stockholders' equity or statement of retained earnings, summarizes equity transactions and their resulting effects on shareholders’ equity over a given accounting period, usually one year. The Securities and Exchange Commission requires each publicly traded corporation to publish its statement of shareholders’ equity in its annual report.
The components of stockholders' equity include the par value of outstanding shares, the amount of retained earnings, the value of any treasury stock and any additional paid-in capital. The statement of shareholders' equity is part of a company's balance sheet, which it issues to its shareholders on a quarterly or annual basis.
The Stockholders' Equity Formula
A statement of shareholders' equity will generally list the different components, which include par value of common stock and preferred stock, plus any premiums on the stock (the amount above par value that was actually paid on the market, also called paid-in capital) and retained earnings. The total of these numbers will be the total shareholders' equity.
Value of Outstanding Shares
Corporations may issue shares of two types: common and preferred. The statement of shareholders’ equity states the par value (face value) of outstanding common stock. Outstanding shares are those a company has sold and has not repurchased. If the company has also sold preferred shares, the par value of these is listed as well. The amounts for shares newly sold during the year are also stated.
Value of Retained Earnings
Some of a company’s equity is in the form of retained earnings. Retained earnings are the portion of net income the company keeps instead of paying out to stockholders as dividends. For a firm that has been in business for a long time, retained earnings may be the largest entry on a statement of shareholders’ equity. The statement of shareholders' equity states the retained earnings at the start of the year, net income, dividends paid and the amount of retained earnings at the end of the year.
Value of Treasury Stock
A company may decide to repurchase shares of stock previously sold. These repurchased shares are known as treasury stock. As with other categories of shareholders’ equity, the total at the beginning of the year is stated, then any additional repurchases of stock or sale of previously held treasury stock, and then the amount of treasury stock held as of the date of the statement of shareholders’ equity. Treasury stock is subtracted from equity because a repurchase reduces the number and total value of the outstanding shares.
Additional Paid-In Capital
When a company sells shares of stock, the sale price is often greater than the par value. The money paid by investors over and above the par value of the shares sold is listed on the statement of shareholders’ equity as additional paid-in capital. You will find additional paid-in capital entries corresponding to the entries for the par values of common stock, preferred stock and newly sold shares.
Purpose of the Statement
Shareholders' equity is the book value of a company; that is, it's the value of the company as recorded on its financial statements. As a result, shareholders' equity might be different from the market value of the company. Shareholders can look at the statement and see how the company is doing and note any changes from year to year, helping them to make better investment decisions.