Define stockholders equity

How to Interpret Stockholders’ Equity

The stockholders' equity concept is important for judging the amount of funds retained within a business. A negative stockholders' equity balance, especially when combined with a large debt liability, is a strong indicator of impending bankruptcy.

However, this situation may also arise in a startup business that is incurring losses while it develops products to bring to market.

Strategic profit model

A startup business typically experiences a decline in its stockholders’ equity until its products become profitable, after which the inflow of profits boosts its retained earnings balance.

Stockholders’ Equity Accounts

A number of accounts comprise stockholders' equity, which are noted below:

• Common stock.

  Common stock is the par value of common stock, which is usually $1 or less per share. In some states, par value may not be required at all. The bulk of all shares sold will typically be comprised of common stock.

• Additional