Liability and Stockholders Equity

Essay by tranz2University, Master'sA-, July 2008

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Liabilities and owners' equity includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year, plus the owners' equity. Often, this side of the balance sheet is simply referred to as "Liabilities."Total liabilities and owners' equity comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are owed to shareholders, including retained earnings reinvested in the business. Stockholders' equityA company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, most companies end up being worth far more in the marketplace than their stockholders' equity would suggest.

For this reason, stockholders' equity is of more interest to value investors than growth investors. Stockholders' equity is the owners' residual interest in an entity's assets, that is, stockholders' equity equals assets less liabilities. We express this in the form of an equation, which is called the accounting equation or balance sheet equation, which is stated as:ASSETS = LIABILITIES + STOCKHOLDERS' EQUITYEquity goes by several names in the real world. Equity is variously referred to as capital, owners' equity, net worth, and net assets. Stockholders' equity has two components: invested capital and earned capital. Stockholders' equity increases for two reasons, investments made by owners, and profitable operations of the business. Equity decreases for two reasons. Owners take money out of the business (dividends), and unprofitable operations of the business. I.B.M. has current liabilities as shown below in the table. Unearned revenues occur when a company is paid...