How to calculate shareholder funds
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The amount of shareholders' funds is the amount of capital shareholders invested into the company. This is the amount the shareholders receive if the company liquidates. Shareholders' value is also known as stockholders' equity. To calculate shareholders' funds, a shareholder will utilise the accounting equation.
The accounting equation states that assets equals liabilities plus stockholders' equity. By rearranging this formula, stockholders' equity equals assets minus liabilities. These three accounts are on the balance sheet and due to the accounting equation always related to each other.
- The amount of shareholders' funds is the amount of capital shareholders invested into the company.
- To calculate shareholders' funds, a shareholder will utilise the accounting equation.
Find the amount of assets the company has on the company's balance sheet. Be sure to use total assets, so you may have to add current assets to noncurrent assets. The company's assets are what the company owns. To own these assets, the company needed to pay for them. Companies pay for these assets using either debt or money from shareholders. To illustrate, let's suppose that a company has £650,000 of assets.
- Find the amount of assets the company has on the company's balance sheet.
- Be sure to use total assets, so you may have to add current assets to noncurrent assets.
Find the amount of liabilities the company has on the company's balance sheet. Be sure to use total liabilities, so you may have to add current liabilities to noncurrent liability. Liabilities are what the company owes others. This is primarily debt. In our example, the company has £390,000 in liabilities.
Subtract total liabilities from total assets. By subtracting out total liabilities from debt, you are finding how much money is left if the company sells off all its assets at their book price and then pays off all their liabilities. So, £650,000 minus £390,000 equals shareholders' funds of £260,000. A practical way of thinking about this is the company sells its £650,000 worth of assets for £650,000. The company then uses £390,000 of the assets to pay off their liabilities. The remaining £260,000 of cash from selling the assets then goes to the shareholders.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.