Shareholders' Equity

Shareholders' equity represents the net value of a company owned by its shareholders.

It is calculated as the difference between the company’s total assets and its liabilities.

For example, if Prim Corporation has total assets of one million dollars and liabilities of four hundred thousand dollars, its shareholders' equity would be six hundred thousand dollars.

Shareholders’ equity consists primarily of two parts, namely contributed capital and retained earnings.

Contributed capital is the total investment by shareholders, consisting of common stock at face value and additional paid-in capital exceeding face value.

Prim Corporation issued forty thousand shares at ten dollars each, then four hundred thousand dollars would be recorded as contributed capital.

Retained earnings represent the accumulated profits the company has retained rather than distributed as dividends.

If Prim Corporation has retained two hundred thousand dollars of its net income over the years, this amount would be shown under retained earnings.

The total of contributed capital and retained earnings is presented as the total shareholders' equity on the balance sheet.