How to Increase Shareholder Equity
Businesses can acquire the assets needed to start up, maintain and run their operations either through incurring obligations to other economic entities or through receiving them as investment from their owners. Such obligations are called liabilities, while such investment is called equity. Equity represents the portion of the business’s assets that can be considered to be owned outright by the business and its owners rather than owed to creditors. Equity can increase through the business reinvesting its income in its operations, through the business selling shares, and through owners investing more resources in the business.
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Instructions
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Reinvest earnings into the business’s operations rather than distributing them to shareholders as dividends. Retained earnings is an equity account that represents the accumulated earnings that businesses choose to reinvest into their operations rather than distribute. The change in retained earnings is calculated as being the period’s net income minus dividends declared for that period. For example, if a business made $80,000 in net income and declared $3 in dividends on its 10,000 outstanding common shares, that business’s retained earnings would see an increase of $50,000.
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Sell shares in the business. Such shares can be either common or preferred shares and each separate class of shares confers different benefits to its shareholders. The capital raised through selling shares is simply the number of shares sold multiplied by their issuing price. For example, if a business sold 10,000 in common shares at $20 a share, that business would record a $200,000 increase in its cash account and a corresponding increase in its equity account of common capital stock.
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Increase accumulated other comprehensive income. Accumulated other comprehensive income is a catch-all term for several concepts, such as unrealized gains and losses and certain donations. For example, if a business holds 2,000 shares purchased at $10 each and their price rises to $12 each, that business receives a $4,000 unrealized gain because it cannot realize that gain until it sells the shares.
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References
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