Shareholders' funds refers to the amount of equity in a company, which belongs to the shareholders. The amount of shareholders' funds yields an approximation of theoretically how much the shareholders would receive if a business were to liquidate. The amount of shareholders' funds can be calculated by subtracting the total amount of liabilities on a company's balance sheet from the total amount of assets. Also, if the balance sheet includes the financial position of subsidiaries, then the recorded amount of minority interests must also be excluded from the calculation.
Shareholders' funds are usually considered to be comprised of the common stock, preferred stock, retained earnings, and treasury stock accounts.
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Calculation of Shareholders’ Funds
To calculate shareholders' funds, subtract total liabilities and minority interests from total assets. The formula is as follows:
Total assets - Total liabilities - Minority interests = Shareholders' funds
Example of Shareholders’ Funds Calculation
ABC International reports $1,000,000 of total assets and $750,000 of total liabilities, along with $50,000 of minority interests. Based on this information, the amount of shareholders' funds is $200,000.
Problems with Shareholders’ Funds
The shareholders’ funds calculation only reflects the book value of equity. The actual amount of shareholders' funds could be substantially different, if the market value of total liabilities were to be subtracted from the market value of total assets. Also, the liquidation of value of the assets of a business may vary substantially from their market value, especially if the liquidation is rushed. In the event of a rushed liquidation, the cash amount realized from the sale of assets tends to be greatly reduced.
Changes to Shareholders’ Funds
The amount of shareholders' funds will change over the course of an accounting period based on the following activities:
= Beginning shareholders' equity
+ Income
+ Payments received from shares sold
- Dividends paid
- Losses
- Cash paid for treasury stock purchased
= Ending shareholders' equity
Terms Similar to Shareholders’ Funds
Shareholders' funds is also known as shareholders' equity or shareholders' capital.
