Stockholders’ equity is an essential component of the balance sheet. This section shares information regarding the amount of financing the company receives from stockholders' contributions rather than by borrowing money. This section provides information regarding the portion of the business that belongs to the stockholders. The stockholders’ equity consists of contributed capital from the stockholders and the earned equity. Contributed capital consists of capital stock and paid-in capital. Earned equity refers to retained earnings. In order to determine the ending balance of stockholders’ equity, the company needs to know the total contributed capital and the total retained earnings.
Items you will need
- Prior year balance sheet
- Current year income statement
- Current year statement of cash flows
Locate the beginning retained earnings balance. Review the prior year’s balance sheet. The retained earnings balance appears in the stockholders’ equity section. Write down this balance.
Determine whether the company paid any dividends throughout the year. Review the current year’s statement of cash flows. Dividend payments appear in the "cash flows from financing activities" section. Write down the dividend amount.
Identify the net income for the year. Review the current year’s income statement. The net income appears at the bottom of the statement. Write down the net income.
Calculate the ending retained earnings balance. Add the beginning retained earnings balance and the net income. Subtract the dividends paid. This provides the ending retained earnings balance.
Calculate the ending value of capital stock. Locate the capital stock balance from the prior year’s balance sheet. Review company stock issuance transactions from the current year. Add the par value of additional shares of stock issued to the beginning balance. This provides the ending balance of capital stock.
Calculate ending value of paid-in capital. Locate the "paid-in capital balance" from the prior year’s balance sheet. Review company stock issuance transactions from the current year. Add the payments received for each share of stock issued. Subtract the par value of these additional shares of stock issued. The resulting number is the ending balance of paid-in capital.
Add capital stock to paid-in capital to determine the total contributed capital.
Combine the retained earnings balance and the contributed capital balance to determine the total stockholders' equity.
Total stockholders' equity needs to equal total assets minus total liabilities. Compare your total to this calculation to verify your calculations.