Understanding Stockholders' Equity: Explained in Simple Terms

TLDRStockholders' equity is the net worth of a corporation, calculated as the difference between its assets and liabilities. It consists of contributed capital and retained earnings. Contributed capital is the amount stockholders pay into the company, including the par value of shares and any additional amount. Retained earnings include the undistributed net income earned by the corporation. Dividends decrease retained earnings, while net income increases it. Stockholders' equity is an important measure of a company's financial health.

Key insights

📚Stockholders' equity is the owners' right to the resources of a business, representing the net worth of the organization.

💰Equity is calculated as the difference between a company's assets and liabilities, indicating the portion of resources owned by the owners.

📈Contributed capital is the capital stockholders pay into the company, including the par value of shares and any additional amount.

💼Retained earnings include the undistributed net income earned by the corporation, which can be reinvested or used to pay off creditors.

📉Dividends decrease retained earnings, representing a distribution of the corporation's earnings to stockholders.

Q&A

What is stockholders' equity?

—Stockholders' equity is the net worth of a corporation, calculated as the difference between its assets and liabilities. It represents the owners' right to the resources of the business.

How is equity calculated?

—Equity is calculated as the difference between a company's assets and liabilities. It indicates the portion of resources owned by the owners.

What is contributed capital?

—Contributed capital is the capital stockholders pay into the company. It includes the par value of shares and any additional amount.

What are retained earnings?

—Retained earnings include the undistributed net income earned by the corporation. They can be reinvested in the organization or used to pay off creditors.

How do dividends affect stockholders' equity?

—Dividends decrease retained earnings, representing a distribution of the corporation's earnings to stockholders.

Timestamped Summary

00:00Equity is the owners' right to the resources of a business, representing its net worth.

00:28Equity is calculated as the difference between a company's assets and liabilities.

01:01Contributed capital is the amount stockholders pay into the company, including the par value of shares.

01:27Retained earnings include the undistributed net income earned by the corporation.

02:01Dividends decrease retained earnings, representing a distribution of the corporation's earnings to stockholders.

Browse more