Equity Formula states that the total value of the equity of the company is equal to the sum of the total assets of the company present at the particular point of time minus the sum of the total liabilities of the company during the same period of time.
What is the Equity Formula?
The formula for a total equity of a business is very simple and it is calculated by subtracting all of its liabilities from all of its assets. The equity is also known as shareholder’s equity and it is easily available as a line item in the balance sheet. The equity can be seen as the net value of a business or the amount that would be received by the shareholders if all the assets of the company are liquidated while all its debts are repaid. In short, the equity measures the net worth of a company or what is left over after deducting the value of all the liabilities of a company from the value of all of its 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,
Explanation of the Total Equity Formula
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, the calculation of equity can be done by deducting the total liabilities from the total assets.
On the other hand, equity can also be computed by using the following steps:
Step 1: Firstly, bring together all the categories under shareholder’s equity from the balance sheet, such as common stock, additional paid-in capital, retained earnings and treasury stock.
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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 of Total Equity Formula (with Excel Template)
Let’s see some simple to advanced examples of Equity Equation to understand it better.
Example #1
Let us consider an example to compute the total equity for a company called ABC Limited which 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.
Given,
- Total Assets = $750,000
- Total Liabilities = $450,000
Therefore, the calculation of total equity can be done as,
- Total Equity Formula = $750,000 – $450,000
Therefore, Total Equity will be –
- = $300,000
Therefore, the total equity of ABC Limited as on 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 formulas mentioned above.
#1 – Total Equity = Total Assets – Total Liabilities
Using this formula 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 Formula = 3,75,319-2,41,272
- Total Equity = 1,34,047
Total equity as on Sep 29, 2018
- Total Equity Formula = 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 formula 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 Formula = 35,867 + 98,330 – 150
- Total Equity = 1,34,047
Total equity as on Sep 29, 2018
- Total Equity Formula= 40,201 + 70,400 +(-3,454)
- Total Equity = 107,147
This means that Apple Inc.’s equity has decreased from $134,047 Mn as on Sep 30, 2017 to $107,147 Mn as on Sep 29, 2018.
Relevance and Use
The understanding of equity equation is very important from an investor’s point of view because 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. Since, the shareholder’s equity is dependent on the total equity of the company, as such a shareholder who is concerned for his own earnings will also be concerned for the company.
Purchasing stock of a company over a period of time, besides giving the privilege or the right to vote in a board of directors elections, will also yield capital gains for the shareholder and potentially dividends. All these benefits eventually create a shareholder’s ongoing interest in the equity of the company.
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This has been a guide to Equity Formula. Here we discuss how to calculate Total Equity using its formula and its uses along with practical examples. You can learn more about Accounting from the following articles –
