Final answer:
Stockholders' equity is calculated as the value of what stockholders own in a firm minus the liabilities of the firm. For instance, if a firm's assets are worth $200,000 and the liabilities are $180,000, the equity is $20,000.
Step-by-step explanation:
Stockholders' equity is the value of what stockholders own in a firm minus the liabilities of the firm. To clarify using an example, if the market value of a firm's assets is $200,000 and it owes $180,000 to creditors, then the stockholders' equity is $20,000.
This is analogous to homeownership, where equity is the market value of the house minus what is still owed to the bank. Similarly, in a business context, stockholders' equity is like the home's equity. If someone's house is valued at $250,000 and they do not owe anything to the bank, their equity is the full $250,000. For stockholders, if the value of the shares they own (representing partial ownership of the firm) and any other assets is $250,000 and the company's liabilities total zero, their equity in the company is also $250,000.