How do you calculate shareholders' equity?

To calculate shareholders' equity, the correct approach is to find the net difference between total assets and total liabilities. Shareholders' equity represents the residual interest in the assets of a company after deducting liabilities. This means that the equity reflects what the shareholders own outright, which is calculated using the fundamental accounting equation:

Shareholders' Equity = Total Assets - Total Liabilities.

In this equation, total assets are everything the company owns, while total liabilities represent all debts or obligations the company must pay. By taking the difference, you are left with the net value that belongs to the shareholders, thus providing a clear picture of the company's financial health from the perspective of equity holders.

Understanding this concept is essential, as it helps in assessing how much owners would theoretically receive if the business were liquidated and debts were paid. In the context of the other options, they either misinterpret the relationship between assets, liabilities, and equity or incorrectly summarize the components involved in determining shareholders' equity.