Staff Accountant, Gilmour Knotts
Tax Question:
What is Shareholders’ Equity?
Facts:
Shareholders’ Equity is often used to measure the net worth of a company. It is used to assess the financial strength of a company.
Discussion:
Shareholders’ Equity (also commonly referred to as Owners’ Equity) comes from two sources:
- Share Capital — Capital directly invested in the company by the shareholders
- Retained earnings – Profits that have been reinvested into the company rather than paid out to the shareholders through dividends
Shareholders’ Equity can be calculated in two ways:
- Assets less Liabilities
- Share Capital plus Retained Earnings
For example: Company ABC has Assets of $100,000, Liabilities of $50,000, Share Capital of $1,000 and Retained Earnings of $49,000:
Share Capital = $100,000 – $50,000 (Assets – Liabilities) = $50,000 or
Share Capital = $1,000 + $49,000 (Share Capital + Retained Earnings) = $50,000
The Shareholders’ Equity reflects the financial health of a company. If the company has had profitable years and has reinvested the profits into assets of the company, it will have a positive Shareholders’ Equity. If the company’s losses exceed its profits, or if Liabilities exceed Assets, the company will have a negative Shareholders’ Equity.
Positive Shareholders’ Equity represents the amount that would be returned to shareholders should the company liquidate. Negative Shareholders’ Equity means the company does not have enough assets to cover its debt. A company with negative Shareholders’ Equity may be at risk of loan default or bankruptcy.
Dawn Loeffler, BA (Hons), CPA, CA
Manager, Gilmour Group CPA’s
Email: faqs@gilmour.ca
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