The difference between the assets and liabilities of a company is the equity of stockholder. The difference has a different meaning for an individual, depending on the type of business.
In case of a sole proprietorship, the business and its owner are legally indissoluble. The stockholder’s equity in such business is the individual owner’s 100 % share in the business. Since the proprietor is the sole owner, the stockholder’s equity equals the company’s total assets minus its total liabilities.
When two or more people join together in a business venture, it is called partnership. A partnership may be formed without any formal agreement, in which case the equity of owners is equally divided among the partners. In case different partners contribute varying amounts of money and expertise, a partnership agreement can be formed and stockholders’ equity divisions are done as per the respective contributions.
Corporations are not the same as partnerships or proprietorships. Those owning the corporate are known as shareholders as they posses share of the capital stock of the corporation. Stock shares may be bought from the open market as also directly from the corporation at times.
The balance sheet of a company mentions its equity, assets and liabilities. The assets comprise of the funds at company’s disposal, whereas liabilities means what it needs to payback to others. Equity means the part of company’s monetary resources which the owners are capable of claiming. Equity plus liabilities always equal assets.
In case of companies, equity is frequently referred to as shareholders’ equity, which equals assets minus its liabilities or we can say it is the share capital including retained income minus the value of share buybacks. Share capital is the amount of funds poured into business by various shareholders, including preferred and common shares. Retained income is the accumulated profits of the company that it reinvested in carrying forward its business. The shares that the company buys back are known as share buybacks.
Common and Preferred Shares
Different types of shares provide different types of responsibilities and benefits to its shareholders. Basically, these can be classified as preferential or common shares. Common shares allow their holders to have a limited say in the decision making process of the company, whereas preferential shareholders have no role in decision making process but are guaranteed a predefined amount of dividend/ year.
Equity of common shareholders is equal to the total equity of shareholders minus the preferred shareholding. Average equity of common shareholders can be calculated by adding up common shareholders’ equity at the commencement of the year and common shareholders’ equity at the end of the year and dividing the figure by two.