Stockholders' equity is the residual amount of funds in a business that theoretically belong to its owners. The amount of stockholders' equity can be calculated in a number of ways, including the following:
The simplest approach is to look for the stockholders' equity subtotal in the bottom half of a company's balance sheet; this document already aggregates the required information.
If the preceding options are not available, it will be necessary to compile the amount from individual accounts in a company's general ledger. If so, the stockholders' equity formula is:
The amount of stockholders' equity is really more of a theoretical concept, for it does not accurately reflect the amount of funds that would be distributed to shareholders if a business were to be liquidated. The following valuation issues should also be considered:
Future events. The sale price of a business will incorporate the expectations of the buyer and seller regarding future events, such as a decline in industry activity, or the reverse. These changes do not appear in the balance sheet.
In short, there are several ways to calculate stockholders' equity (all of which yield the same result), but the outcome may not be of particular value to the shareholder.