The owner’s claims to the business are called stockholder’s equity (also known as shareholders’ equity) and reported in the Equity section of the balance sheet.
Stockholder’s equity is simply net assets that consists of invested capital and retained earnings.
The proceeds from issuing new stocks to the public are known as invested, contributed or paid-in capital.
Owners also contribute funds to a company by allowing profits to be reinvested.
In a corporation, these reinvested profits are called Retained earnings or Earned capital.
Usually the Equity section of a corporation’s balance sheet would include paid-in capital and retained earnings but a number of other equity Items can be presented as well.
1. Contributed capital:
2. Capital surplus (Additional paid-in capital)
3. Retained earnings
4. Less Treasury common stock
5. Accumulated other comprehensive income warrants reported in stockholders equity
6. Noncontrolling interest
Two general categories of contributed capital are common and preferred stock with their par value, the number of shares authorized, issued and outstanding.
Authorized shares – are the maximum number allowed to issue.
Issued shares – are those that were sold and transferred to shareholders
Outstanding shares – are those that actually in the hands of stockholders
Common Stock (also known as residual equity)
The owners of the common stock of a corporation can be thought of as the true owners of the business and thus have votes to elect officers, establish governing rules and control the corporation.
Usually, each corporation has only one class of common stock but sometimes there is more than one class.
This stock gives its owners preference over common stockholders in terms of receiving dividends before common stockholders and in terms of claims to assets if the corporation is liquidated.
Compared to common stock, preferred gives up some rights of ownership such as voting and participating in success of corporation (usually common stocks are more sensitive to earnings of the corporation).
Preferred stocks classified as follows:
Cumulative and Noncumulative Preferred Stock depending on the dividend amount per share that can be accumulated from year to year or not.
Participating Preferred Stock can provide additional dividends to be paid to preferred stockholders
Convertible Preferred Stock can be converted into common stocks at a ratio stated in the company’s preferred stock contract.
Redeemable Preferred Stock can be redeemable at the option of the stockholder
Callable Preferred Stock – the issuing corporation can redeem or retire it at a price stated in the preferred stock contract
This is the amounts paid in, or contributed, in excess of the par value per share. Par value is an arbitrary amount stated on the face of the stock certificate and represents the legal capital of the corporation. Generally, par value is very low and has nothing to do with the market price. When corporation purchases its own shares from the market the difference between the market price and the par value is paid-in capital. That is why capital surplus is also called premium on stock.
Represent the stockholders’ claim to the assets that are earned from operations (and reinvested in the company) less losses and dividends paid to stockholders over the life of the business. This statement actually means that retain earnings are not assets or amount of cash. It means that assets generated by profitable operations have been kept in the company to help it grow or meet other business
Treasury stock is created when a company buys back its own stock. Stock is not retired but held for some reasons and is not considered as outstanding and thus has no voting rights.
Company cannot own itself, so when it buys its own shares, they Increase Treasury Stock account which is a contra account in equity (not an asset).
Accumulated other comprehensive income
This is the cumulative amount of income (or loss) that has not been included in the net income reported on the corporation’s income statement and thus are not recorded in the Retained Earnings.
Instead, it is shown in the equity account Accumulated other Comprehensive Income.
Previously known as Minority interest, shows the ownership of noncontrolling shareholders in the equity of consolidated subsidiaries less than wholly owned.
This part was usually presented after liabilities and before shareholder’s equity.
The SEC can require large public companies to provide a picture of the changes in stockholders’ equity.
Changes in accounts like Retained Earnings, Common Stock, Preferred Stock, and Treasury Stock are shown in the consolidated statements of shareholders’ equity.
When a corporation has a complex capital structure, the stockholder’s equity section of the balance sheet may have a line item under contributed capital that states how many other stock warrants and options are outstanding with their corresponding values.