What is Shareholders’ Equity?

Shareholders' equity is the net amount of an organization's assets and liabilities. If all of a company's assets were to be liquidated and its liabilities settled at their book values, the remainder (which is shareholders' equity) would be paid out to shareholders. However, since market values rarely match book values, the actual amount paid out would likely be different.

If total assets exceed total liabilities, then shareholders' equity will be a positive figure. Positive equity is an indicator of the viability of a business, since it suggests that employees are managing the company in a prudent manner. In addition, positive equity suggests that there may be reserves that can be used if the company encounters difficult times in the future.

Shareholders’ Equity Accounts

There are several accounts used within the shareholders’ equity classification. They include the following:

Common stock. This account contains the par value of all issued stock. Par value tends to be quite small, such as $0.01 per share, so the balance in this account may be minor.
Additional paid-in capital. This account contains any payments received from investors that exceed the par value of the stock that was purchased.
Retained earnings. This account contains the net earnings of the business, minus any dividends paid out.
Treasury stock. This account contains the amount paid to purchase shares back from shareholders.

What is Negative Shareholders’ Equity?

Negative shareholders’ equity arises when total assets are less than total liabilities. Negative equity is an indicator that a business is poorly run and has no reserves to protect it, and so is at risk of bankruptcy. However, it is also common for a startup business to report negative equity, since it is incurring losses as it engages in product development and marketing activities; once its products are launched, it is expected to earn enough profits to reverse the negative equity situation.

Example of Shareholders’ Equity

As an example of the shareholders' equity calculation, ABC Corporation has total assets of $1,000,000 and total liabilities of $800,000. Therefore, its shareholders' equity is $200,000.