Stockholders’ Equity is the amount of the business that belongs to the owners of that business.
For example, let’s say the business owns one asset, a building for which they paid $200,000. They did not have $200,000 in cash to buy the building so they paid $20,000 and borrowed $180,000 from the bank. If the building were sold for $200,000 they would have to repay the bank $180,000 which would leave $20,000 in cash for them. The $20,000 is their equity. Most people would say, “I bought a building for $200,000. I own that building.” In reality, that’s not true. You owe the bank $180,000. You have a debt of $180,000. In reality the bank owns $180,000 of the building. You only own $20,000. $20,000 is your equity. Stockholder’ equity is composed of two main parts: 1) common stock which is the amount the owners invested in the business and 2) retained earnings which are the profits of the business which were kept in the business rather than being dispersed to the owners. (When dealing with a sole proprietorship, the equity is called capital.)
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