Formula to Calculate Total Equity of a Company
Equity Formula states that the total value of the equity of the company is equal to the sum of the total assets minus the sum of the total liabilities.
Here total assets refers to assets present at the particular point and total liabilities means liability during the same period of time.
Equity is also known as shareholder’s equity and is easily available as a line item in the balance sheet. We can term equity as the net value of a business. It is the amount received by the shareholders if we liquidate all the assets of the company and repay all the debt. In short, equity measures the net worth of a company or leftover after deducting all the liabilities value from the value of the assets. As such, it is a common financial metrics which is used by most of the analysts to assess the financial health of a company.
Mathematically, an equation of equity represented as,
However, there are different classes of ownership units, which include preferred stock and common stock. Further, there are various sections in the shareholders’ equity of the balance sheet, such as common stock, additional paid-in capital, retained earnings, and treasury stock. Consequently, an alternative approach for the calculation of total equity is as below,
Step by Step Calculation of Equity
The calculation of the equity equation is easy and can be derived in the following two steps:
- Step 1: Firstly, pull together the total assets and the total liabilities from the balance sheet.
- Step 2: Finally, we calculate equity by deducting the total liabilities from the total assets.
On the other hand, we can also calculate equity by using the following steps:
- Step 1: Firstly, bring together all the categories under shareholder’s equity from the balance sheet. I.e., common stock, additional paid-in capital, retained earnings, and treasury stock.
- Step 2: Then, add up all the categories except the treasury stock, which has to be deducted from the sum, as shown below.
Total Equity = Common Stock + Preferred Stock + Additional Paid-in Capital + Retained Earnings – Treasury Stock
Examples
Example #1
Let us consider an example to compute the total equity for a company called ABC Limited. It is in the business of manufacturing customized roller skates for both professional and amateur skaters. As per the balance sheet of ABC Limited for the financial year ended on March 31, 20XX, the total assets are $750,000, and the total liabilities are $450,000.
4.9 (1,067 ratings) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
Given,
- Total Assets = $750,000
- Total Liabilities = $450,000
Therefore, the calculation of total equity can be done as,
- Total Equity = $750,000 – $450,000
Therefore, Total Equity will be –
- = $300,000
Therefore, the total equity of ABC Limited as of March 31, 20XX is $300,000.
Example #2
Let us take the real-life example of Apple Inc.’s annual report as on September 29, 2018, and September 30, 2017, for the calculation of total equity. The following information is available:
So from the above-given information, we will do the calculation for the total equity using both the equations mentioned above.
#1 – Total Equity = Total Assets – Total Liabilities
Using this equation, we will do the calculation of total equity for both September 29, 2018, and September 30, 2017
Total Equity as on Sep 30, 2017
- Total Equity = 3,75,319-2,41,272;
- Total Equity = 1,34,047;
Total equity as on Sep 29, 2018
- Total Equity = 3,65,725 – 2,58,578;
- Total Equity = 1,07,147;
#2 – Total Equity = Common stock and additional paid-in capital + Retained earnings + Accumulated other comprehensive income/(loss)
Using this equation, we will do the calculation of total equity for both September 29, 2018, and September 30, 2017
Total Equity as on Sep 30, 2017
- Total Equity = 35,867 + 98,330 – 150
- Total Equity = 1,34,047
Total equity as on Sep 29, 2018
- Total Equity= 40,201 + 70,400 +(-3,454)
- Total Equity = 107,147
It means that Apple Inc.’s equity has decreased. From $134,047 Mn as of September 30, 2017, to $107,147 Mn as of September 29, 2018.
Relevance and Use of Equity Formula
The understanding of the equity equation is critical from an investor’s point of view. It represents the real value of one’s stake in an investment. Shareholders of a company are typically interested in the shareholder’s equity of the company, which is represented by their shares. The shareholder’s equity is dependent on the total equity of the company. Thus a shareholder who is concerned for his earnings will also be concerned for the company.
Purchasing stock of a company over some time gives the privilege or the right to vote in a board of directors elections. It also yields capital gains for the shareholder and potentially dividends. All these benefits eventually create a shareholder’s ongoing interest in the equity of the company.
Recommended Articles:
This article has been a guide to Equity Formula. Here we learn how to calculate total equity using its formula along with practical examples and downloadable excel template. You can learn more about Accounting from the following articles –
