Everything You Need to Know About the Statement of Shareholder Equity

What is a statement of shareholders’ equity?

A statement of shareholder’s equity, also called a “statement of stockholders’ equity” or a “statement of owner’s equity,” is a section of a business’s balance sheet that lists the difference between total assets and total liabilities. It gives shareholders, investors and the company’s owner a true picture of how the business is performing and is usually measured monthly, quarterly or annually.  

Shareholders’ equity can increase:

• If business owners or investors contribute more capital.
• If the business’s profits improve as it sells more products.
• If the business increases its margins by cutting business expenses.

The statement of shareholders’ equity may intimidate some small business owners because it’s a bit more complicated than other financial calculations. However, in simplest terms, it’s essentially what your organization has earned that remains in the business.

“The statement of shareholder equity tends to be overlooked because people focus on the profit or loss statement or cash flow,” explained Craig M. Steinhoff, a certified public accountant (CPA) and information technology professional with HBK CPAs & Consultants. However, it’s a crucial tool for helping business owners evaluate potential investments and measure their business’s performance and worth.

What is shareholders’ equity?

Shareholder’s equity is what remains after subtracting all liabilities from a company’s assets. For a company with stock shares, stockholders own the equity. Otherwise, business owners or investors own the equity.

Shareholders’ equity has several components, each with its own value and meaning:

• Share capital: 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 paid directly to the company for the initial offering is the share capital.
• Retained earnings: Retained earnings are the money left in a business after the shareholders are paid dividends. With dividend stocks, shareholders are entitled to a percentage of the company’s profits. The company must still calculate how much money it has to work with after making these payments; that calculation is the retained earnings.
• Net income: Net income is the money left after subtracting expenses and deductions from the total profit. In this case, profit is the amount of money made after subtracting the cost of operations.
• Dividends: Dividends are funds paid to shareholders. Investors who own stock in a company own a portion of the business and are entitled to a percentage of the profits. A dividend is the amount of money paid per share of stock. The company will set aside a portion of its profits to pay dividends (that portion is usually outlined in the stock agreement).

Who uses a statement of shareholder equity?

Businesses of all sizes use the statement of shareholder equity (or owner’s equity if the business isn’t public). 

“If you have more than a sole proprietorship, it’s always a good idea to have a statement of stockholder equity,” advised Meredith Stoddard, group team lead at Fidelity Investments. “It’s an important document that spells out where the assets and liabilities are and who owns what.”

Why should you use a statement of shareholder equity?

In both prosperous and challenging times, small business owners must understand how their business is faring over a specific period. Without a statement of shareholder equity, that can be challenging. 

A statement of shareholder equity is a valuable tool for gauging the health of a business for the following reasons.

1. A statement of shareholder equity can help you make financial decisions.

A statement of shareholder equity can help you value your business and plan for the future. It can reveal if you should borrow more money to open another business location, cut costs or profit from a sale. It can also help you find and attract investors ― who will undoubtedly want to see that statement before injecting capital into your organization.

2. A statement of shareholder equity can tell you how well you’re running your business.

A statement of shareholder equity is helpful for gauging how well the business owner is running the organization. If shareholder equity declines from one accounting period to the next, it’s a telltale sign that the business owner is doing something wrong.

3. A statement of shareholder equity can help you get through financial difficulties.

The statement of shareholder equity is essential in trying times. It will reveal whether you didn’t make enough to sustain operations or whether you have enough equity in the business to get through a downturn. The statement of shareholder equity also shows whether you’re likely to get approved for a business loan, whether there’s value in selling the business and whether it makes sense for investors to contribute.

What does the statement of shareholder equity include?

Statements of shareholder equity vary depending on business size and operational factors. However, most will include the following: 

• Preferred stock: Preferred stock is a share in the company (or an ownership stake) issued as stock or equity. Preferred shareholders are held in higher esteem than common shareholders when it comes to dividends and asset distribution.
• Common stock: Common stock is also a share in the company, but it takes a back seat to preferred stock when paying out equity. For example, if the business decides to liquidate, preferred shareholders will get paid before common shareholders. However, common shareholders tend to have voting rights while preferred shareholders usually don’t.
• Treasury stock: Treasury stock refers to shares the company buys back, whether to prevent a hostile takeover or drive the stock price higher. This type of stock typically pertains to publicly traded companies.
• Retained earnings: Retained earnings are net profits on the income statement that aren’t paid out to shareholders or used as the owner’s draw. They are reinvested in the business. They can be used to purchase new equipment, invest in research and development or pay down costly debt.
• Contributed capital: Often referred to as additional paid-up capital, contributed capital is the extra amount investors pay for shares over the par value of the business. This additional capital is created when a company issues new shares. It can be reduced when the company buys back its shares.
• Unrealized gains and losses: These are the gains and losses a business sees as a direct result of a change in the value of its investments. Unrealized gains occur when the business has yet to cash in those gains, while unrealized losses are the reductions in value before the investment is unloaded.

How do you create a statement of shareholder equity?

You’ll structure your statement of shareholder equity with four sections that paint a picture of how the business is doing:

• Section One: Equity. The first section shows the business’s equity at the beginning of the accounting period.
• Section Two: New equity infusions. This section lists new investments that shareholders or owners made to the company for the year. Net income is also included in this calculation.
• Section Three: Subtractions. This section subtracts all dividends paid out to investors and any net losses.
• Section Four: Equity balance. The final section shows your ending equity balance for the period you’re tracking.

The statement’s heading should include the company name, the title of the statement and the accounting period to prevent confusion when you search for these financial statements later.

Business owners can create a physical shareholder statement of equity to include in their balance sheet using Excel, a template or one of the best accounting software platforms, which will automate much of the work for you. 

Here’s an example of a statement of shareholder equity:

Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.