Total stockholders' equity represents either the source of a company's assets, the owners' residual claim of a company's assets after its liabilities have been paid, or the company's total book value. Total stockholders' equity represents how much a company would have left over in assets if the company went out of business immediately.
TSE=CC+[BRE+(R−E)−D]where:TSE= Total stockholders’ equity at the endCC= Contributed capitalBRE= Beginning retained earningsR= RevenueE= Expenses
Contributed capital is the portion of total stockholders' equity that summarizes the total value of a company's stock that shareholders have purchased from the company or invested in the company.
Retained earnings are the total of a company's profits after dividend payments have been made to shareholders. Retained earnings summarizes what a company did with its profits since its inception. The amount of dividends paid out to stockholders, which subtracts from retained earnings, is a signal of a company's dividend payout policy. A company's board of directors decides whether it wants to distribute profits as dividends, reinvest the profits back into the company or both.
If a company decides not to pay out a dividend and instead reinvest all of the net profits back into the company, then a company's retained earnings for the period would equal its net income, and its total retained earnings would be its net income for the period plus the amount of retained earnings at the beginning of the period.
Companies can reinvest net income in the form of retained earnings by purchasing assets or paying down liabilities.