Stockholders’ Equity Definition in Accounting

Posted by Grace under Investing on November 1, 2014

Reading accounting books can help you expand your knowledge in finances. Do you know what is the meaning and definition of stockholders equity? If you are investing in the stock market, you already know this, but if you are still planning to play the stock market game, you should know this. How do you know if your equity was increased? How do you calculate your stock equity? Here in InvestmentTotal, I include some financial terms for you to make investing not to be complicated. I always saying that the more you know, the more money you can make, but it depends on what you want to know.

Stockholders’ Equity Definition in Accounting

Stockholder: “It represents ownership interest in a firm. Also the residual dollar value of a futures trading account, assuming its liquidation at the going market price.”

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“A stockholder’s equity is the balance sheet item that includes the book value of ownership in the corporation. It includes capital stock, paid in surplus and retained earnings” or “the residual claims that stockholders have against a firms assets, calculated by subtracting total liabilities from total assets.”

Reference: Julia Dictionary Inc.

What is a capital stock and retained earnings? Capital stock simply means the capital invested by the stockholders that is recorded in the corporations accounting records while retained earnings is the increase of stockholders’ equity arising from profitable operations.

“When stockholders invest cash or other assets in the business, the corporation issues in exchanges shares of capital stock as evidence of the stockholders’ equity ownership.”

A. Stockholders’ Equity on the Balance Sheet
Capital Stock: $250,000
Retained Earnings: $50,000
Paid in Capital and Retained Earnings: $300,000

B. Stockholders’ Equity on the Balance Sheet
Capital Stock: $250,000
Less: Deficit: $10,000
Paid in Capital and Less Losses Incurred: $240,000

Reference: Accounting: The Basis for Business Decisions 8th Edition by Robert F. Meigs and Walter B. Meigs, McGraw-Hill Publishing Company 1991, page 526-528

Read also other financial terms related to stock market investing: Stock Split Definition, Investment Definition and Meaning

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