Shareholders' equity essentially reflects the amount of company assets that are not funded by debt or loans. If you are a novice accountant, to invest in or buy company stock, you will need to know how to calculate shareholder equity. In accounting, shareholder equity forms one of three basic equations for the double-entry bookkeeping method: assets = liabilities + shareholder equity. For investors, this method can be used to quickly calculate the net value of a company so that critical investment decisions can be made. Read the following steps to learn the easiest and most efficient method of calculating shareholder equity.
Step
Method 1 of 2: Subtraction Technique
Step 1. Determine if this method can be used
To be able to use this method, you need a number of total assets (total assets) and total liabilities (total liabilities) of a company. If the target company is a private company, this data is quite difficult to obtain without the direct involvement of management. However, if the company under study is a public company, this data will be visible in the balance sheet section of the company's financial statements.
If you are looking for this information on a publicly listed company, try looking at the company's most recent financial statements available on the company's website or the Indonesia Stock Exchange website
Step 2. Get the total asset value of the company
The formula for calculating total assets is long-term assets plus current assets. This calculation includes all company holdings, from cash, cash equivalents, land to production equipment.
- Long-term assets represent the value of equipment, property and capital assets used for more than one year, less depreciation.
- Current assets are all receivables, inventory in process, inventory, or cash. In accounting terminology, all company assets held for less than 12 months are considered current assets.
- Add up each category (long-term assets and current assets) first to find the value of each and then add them together to get the total asset value of the company.
- For example, a company with total current assets of Rp 535,000,000 (cash Rp 135,000,000 + short-term investment Rp 60,000,000 + receivables Rp 85,000,000 + inventories Rp 225,000,000 + Prepaid insurance Rp 30,000,000) and long-term assets Rp 75,000,000 (investment in shares of IDR 60,000,000 + insurance of IDR 15,000,000). Add these two together to get a value of IDR 535,000,000 + IDR 75,000,000, which is a total asset value of IDR 610,000,000.
Step 3. Calculate the value of the company's total liabilities
Like a company's total assets, the formula for total liabilities is long-term liabilities plus current liabilities. Liabilities are all money that must be paid to creditors, for example bank loans, dividends payable, and trade payables.
- Long-term liabilities are all debt on the balance sheet with maturities of more than one year.
- Current liabilities are the cumulative total of trade payables, salaries payable, and all payables that are due in less than one year.
- Add up each category (long-term and current liabilities) first to get their respective values then add them up to get the total liabilities value.
- For example, the company has total current liabilities of Rp. 165,000,000 (trade payables Rp. 90,000,000 + salaries payable Rp. 10,000,000 + interest payable Rp. 15,000,000 + taxes payable Rp. 5,000,000 + current portion of notes payable Rp. 45,000,000) and long-term debt of Rp. IDR 305,000,000 (notes payable IDR 100,000,000 + bank loan IDR 40,000,000 + mortgage IDR 80,000,000 + deferred tax payable IDR 85,000,000). Add these two values to get a value of IDR 165,000,000 + IDR 305,000, which is the total liability value of IDR 470,000,000.
Step 4. Calculate shareholder equity
Subtract the total value of assets by the total value of liabilities to get the shareholder equity value. Basically, this calculation is just a rearrangement of the basic accounting formula: assets = liabilities + shareholders' equity to shareholders' equity = assets - liabilities.
Continuing the example above, just subtract the total asset value (Rp 610,000,000) by the total liability value (Rp 470,000,000) to obtain Shareholders' Equity of Rp 140,000,000
Method 2 of 2: Component Engineering
Step 1. Determine if this method can be used
The information required is the company's shareholder equity section on the balance sheet or equivalent journal entries in the general ledger. If the target company is a public company, the company's financial statements can be obtained on the internet. However, if the target company is a private company, this information is difficult to obtain without direct assistance from company management.
If you are looking for this information on a publicly listed company, try looking at the company's most recent financial statements available on the company's website or the Indonesia Stock Exchange website
Step 2. Calculate the share capital of the company
Share capital is sometimes referred to as equity financing, share capital is the capital received by the company from the sale of shares. Income from the sale of preferred stock and common stock is considered as share capital.
- The figure used to calculate share capital is the selling price of the stock, not its current market value. This is because share capital reflects the money actually received by the company from the sale of shares.
- For example, suppose a company has a share capital of CU200,000,000 from common stock and CU100,000 from preferred stock. The total share capital is IDR 300,000,000.
- In some cases, this information may be reported separately as common stock, preferred stock, paid-in capital in excess of par (paid-in capital in excess of par). Just add all these components to get the share capital value.
Step 3. Verify the retained earnings of the business
Retained profit is the company's total profit available after paying all of its obligations. Retained earnings are then reinvested in the company. In most cases, retained earnings have a larger portion of shareholder equity than other components.
Retained earnings are generally expressed by the company in one value. In this example, the value is $50,000,000
Step 4. Confirm confirm the value of treasury shares on the company balance sheet
Treasury shares are all shares that a company issues and then repurchases in share buybacks. In addition, treasury shares also include shares that have never been sold to the public.
Like retained earnings, the value of treasury shares generally does not need to be calculated. In this example, the value is only Rp. 15,000,000
Step 5. Calculate shareholder equity
Add share capital to retained earnings and then subtract treasury shares to calculate shareholder equity.
Continuing with the previous example, we add share capital (Rp 300,000,000) to retained earnings (Rp 50,000,000) and subtract Rp 15,000,000 treasury shares to obtain shareholder equity value of Rp 335,000,000
Tips
- Often shareholders' equity is also referred to as owner's equity, stockholders' equity, or net worth of the company. All of these names are interchangeable.
- The term share capital (share capital) can also be used to refer to shareholder equity so that it is easily confused with other functions (referring to the value paid through the sale of common and preferred shares). Check your source to make sure what values are referenced.
- Always pay attention to changes in accounting rules. Changes in the classification of assets and liabilities will cause a revision of the calculation of the company's shareholder equity. For example, in 2006 regulations enforced the inclusion of pension benefits in the balance sheet thereby increasing the value of liabilities in almost all companies.
