A statement of stockholders’ equity is another name for the statement of shareholder equity. This section of the balance sheet is also known as a statement of shareholders’ equity or a statement of owner’s equity. It gives shareholders, investors or the company’s owner a picture of how the business is performing, net of all assets and liabilities.
The statement of stockholders’ equity is the difference between total assets and total liabilities, and is usually measured monthly, quarterly, or annually. It’s found on the balance sheet, which is one of three financial documents that are important to all small businesses. The other two are the income statement and the cash flow statement.
Stockholders’ equity can increase only if there are more capital contributions by the business owner or investors or if the business’s profits improve as it sells more products or increases margins by curbing costs.
Some small business owners may overlook the statement of stockholders’ equity if they are focused only on money coming in and going out. But income shouldn’t be your only focus if you want a good idea of how your operations are faring.
“The statement of shareholder equity tends to be overlooked because people focus on the profit-or-loss statement or cash flow,” Craig M. Steinhoff, a certified public accountant and a member of the American Institute of CPAs’ Consumer Financial Education Advocates, told business.com. This section is important, however, because it helps business owners evaluate how their business is doing, what it’s worth, and what are good investments, he said.
The statement of stockholders’ equity may intimidate some small business owners because it’s a little more complicated than the income statement, but broken down, it’s essentially what your enterprise has made that remains in the business.
“Business owners overlook the statement of shareholder equity because they don’t understand it,” Steinhoff said. “But it’s easier to invest the time in educating yourself, whether through researching online, talking to an advisor, or finding a mentor. This is extremely important. It’s never too late to learn.”
When you take all of the company’s assets and subtract the liabilities, what remains is the equity. For a company with stock shares, the equity is owned by the stockholders. The statement of equity is simply the part of a balance sheet or ledger that clearly calculates and explains the stockholders’ (or shareholders’) equity.
Stockholders’ equity has a few components, each with its own value and meaning.
Share capital is the cash a company raises by issuing stock. In an initial public offering, a set amount of stock is sold for a set price. After that, the stock can be traded freely, but the money that is paid directly to the company for that initial offering is the share capital.
Retained earnings is the amount of money left in the business after the shareholders are paid dividends. With dividend stocks, shareholders are entitled to a percentage of the company’s profits. The company still needs to calculate how much money it has to work with after these payments are made, and that calculation is the retained earnings.
Net income compares profits to expenses and deductions. In short, the net income is the money left after you subtract expenses and deductions from the total profit. In this case, profit is the amount of money made after subtracting the cost of operations.
Dividends refer to funds paid to shareholders. Investors who own stock in a company own a portion of the business. As such, they are entitled to a percentage of the profits. A dividend is the amount of money paid per share of stock, and it is not necessarily equal to the profit. Instead, the company will set aside a portion of its profits to pay dividends, and that portion is usually outlined in the stock agreement.
The statement of stockholder equity is used by companies of all types and sizes, ranging from small businesses with just a handful of employees to large, publicly traded enterprises. For companies that aren’t public, the statement of stockholder equity is often considered the owner’s equity.
“If you have more than a sole proprietorship, it’s always a good idea to have a statement of stockholder equity,” said Meredith Stoddard, life events experience lead at Fidelity Investments. “It’s an important document that spells out where the assets and liabilities are, and who owns what.”
The components of the statement of stockholder equity vary depending on the size of the business and how it operates. Here are some of the elements it can include: