Shareholders' Equity strange formula
I can understand this equity formula:
Shareholders’ Equity = Total Assets ? Total Liabilities
But about this one:
SE = Share Capital + Retained Earnings - Treasury Shares
Why aren't (in the second formula) we taking into account company's bond capital? I mean, lot's of company's assets were bought through loans? Why we only take into account share capital? How can these two formulas possibly give the same number?
(1)1 Comments
Sorted by latest first Latest Oldest Best
Why aren't (in the second formula) we taking into account company's bond capital?
Becasue bonds represent the debt that a company owes. If you buy a 0,000 house with an ,000 mortgage, you only "own" ,000 in equity. If you sell the house, you have to pay back the loan.
Same for a company. If it liquidates its assets, it must pay back its bonds, so whatever is left over is the equity.
So the total equity is the total that it's raised through share (equity) offerings, plus the total net amount it's earned over its lifetime (retained earnings), minus what it's bought back (treasury shares). All other assets must have been bought with debt in order for the accounting equations to balance out.
Terms of Use Privacy policy Contact About Cancellation policy © freshhoot.com2025 All Rights reserved.