Calculating Total Equity: Definition & Formula
Equity is important to owners and investors of a business. In this lesson, you’ll learn what total equity is, how to calculate it, and how it fits into the overall financial picture of a business. A short quiz follows.
Definition of Total Equity
Equity is the value of the business left to its owners after the business has paid all liabilities. Sometimes, there are different classes of ownership units, such as common stock and preferred stock. Total equity is what is left over after you subtract the value of all the liabilities of a company from the value of all of its assets. Equity is reported on a company’s balance sheet.
Classes of Equity
Let’s take a quick look at typical classes of stock ownership and their relevance to equity in a corporate setting.
Common stock is a unit of corporate ownership. If you hold common stock, you are only entitled to any residual equity in the corporation that is left after all of the claims of the corporation’s creditors and preferred stockholders have been paid. Most shareholders hold common stock.
Preferred stock is also a unit of corporate ownership. If you own preferred shares, you are entitled to certain preferences over holders of common stock. For the purposes of our discussion, as a preferred shareholder, you will usually be paid before a common share stockholder if the company goes out of business. In other words, preferred shareholders get equity out of a company before common shareholders.
Formula
The formula to determine equity is derived from the general accounting equation Assets = Liabilities + Equity. After performing the appropriate algebraic operations, we get the following formula for equity:
Equity = Assets – Liabilities
You should note that if the resulting number is negative, then liabilities exceed assets and there is no equity left for the owners of the business.
Examples
You are an accountant of a medium-sized corporation and have been asked to calculate the total equity in the company right now. You determine that the total liabilities of the company amount to $15,236,976 and the total assets of $23,459,090. What’s the total equity?
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