Stockholders’ Equity (Definition, Elements, and Importance)

Equity is the difference found between the assets and liabilities of a particular company. It is usually the reflection of the investments of those who own the organization, therefore, the owners of this heritage are understood as the shareholders or partners of the company.

Due to this, this capital can also be known in accounting as net capital, liquid capital, own capital, or equity. On some occasions, it could be confused with working capital, which consists of the provision of the resources that a company has so that it can operate.

In the same way, a company can have a large equity capital, however, it may not have the liquidity to allow it to operate. This situation is because the entity’s asset accounts tend to be mostly fixed or there is no adequate asset rotation.

Elements of Stockholders’ Equity

Within business, the use of accounting is essential. Its validity is not only focused on the interpretation of financial and economic information, currently, it must be used in a mandatory way so that tax obligations are fulfilled and also for the presentation of financial reports to the various public and private entities that show interest in know what the financial situation of the company is.

This equity conforms to certain accounting principles that are mostly accepted and can be determined by the differences that exist between the total assets of the organization, less the total liabilities.

The result does not by itself express a reasonable proportion, but it is a key reference that the employer will have to know how to interpret appropriately. The main elements that makeup stockholders’ equity will be shown below :

It includes the participation of the shares of the partners, which can contain a fixed and a variable part.

Results of past exercises

It is the sum of the profits and losses that the organization has accumulated and the pending payments that must be paid to the partners on a certain date.

Legal reserve

Mainly, the integration of a capital reserve is mandatory to facilitate the confrontation with possible contingencies in the organization.

Result of the exercise

It is based on the accounting profit or loss for the current period, which must be consistent with the result recorded in the statement of profit or loss.

Updating of non-monetary assets

They can arise from the revaluation of fixed assets and similar items that contain a counterpart that has stockholders’ equity.

Reserve for reinvestment

Mostly it should not be mandatory, however, certain companies incorporate it as part of their business growth policy and that is why it is used to invest in new technologies or also to replace productive assets.

Classification of Stockholders’ Equity

This type of capital is classified as follows:

Contributed capital

They are the contributions that are generated by the owners and by the donations that are received from the entity.

It is found within the contributed capital, this refers to the group of all the contributions of the shareholders that are considered within the articles of incorporation and in the same way in their reforms. In turn, this type of capital is made up of the following:

#1. Authorized capital not issued

It is made up of the difference between the capital of the company that is authorized in the deeds and the amount that is under subscription. This difference may or may not be subscribed, this will depend on the vision of the financial statements, since they do not belong to stockholders’ equity, but they are an information element.

#2.Issued capital not subscribed

It is represented by the part of the capital that is issued in the minutes of the shareholders ‘meeting, it is the part of the capital stock that is not part of the elements of stockholders’ equity from the financial point of view, however, from the point of view informative.

#3.Subscribed capital

It is the part that represents the capital issued by shareholders, committed to displaying it. In this case, the financial statements are usually part of the stockholders’ equity.

#4. Capital subscribed and not displayed

It is part of the representation of the capital subscribed by the shareholders or partners, where the exhibition is pending receipt and is represented by the status of the financial substitution that minimizes the subscribed capital.

#5.Exhibited capital

Identifies the amount shareholders have already displayed or provided effectively.

Earned capital

Indicates the results of the entity’s activities and of other events that could affect the adjustments for recovery of price changes that must be recognized.

Importance of Stockholders’ Equity

The stockholders ‘ equity that is appropriately determined, is a very important tool for investors because they can provide a solid basis for the book value of the shares, the proportion of it that is linked to total assets, and to determine the level of production generated by the investment of the shareholders as part of a supposed financial evaluation.

If, on the contrary, the capital is negatively determined, it could generate an unfavorable situation for the company. With certain legal variations that oscillate between half and two-thirds of the capital stock that is lost.

It is possible to consider that the company is technically bankrupt, its dissolution is probable due to the legal demand of the affected parties, such as the state, suppliers, or employees.

It can come to reflect the financial well-being or discomfort of a company, therefore, its proper interpretation should not only be considered important for external users who are interested in knowing the financial situation, but also for union workers, administrative employees, partners who must be aware of the extent of its importance.