Components of Shareholder's Equity
Also known as "equity" and "net worth", the shareholders' equity refers to the shareholders' ownership interest in a company.
Usually included are:
- Preferred stock - This is the investment by preferred stockholders, which have priority over common shareholders and receive a dividend that has priority over any distribution made to common shareholders. This is usually recorded at par value.
- Additional paid-up capital (contributed capital) - This is capital received from investors for stock; it is equal to capital stock plus paid-in capital. It is also called "contributed capital".
- Common stock - This is the investment by stockholders, and it is valued at par or stated value.
- Retained earnings - This is the total net income (or loss) less the amount distributed to the shareholders in the form of a dividend since the company's initiation.
- Other items - This is an all-inclusive account that may include valuation allowance and cumulative translation allowance (CTA), among others. Valuation allowance pertains to noncurrent investments resulting from selective recognition of market value changes. Cumulative translation allowance is used to report the effects of translating foreign currency transactions, and accounts for foreign affiliates.
These components are listed in the order of their liquidation priority.
Figure 6.5: Sample Balance Sheet
Stockholders' Equity Statement
Instead of presenting a detailed stockholders' equity section in the balance sheet and a retained earnings statement, many companies prepare a stockholders' equity statement.
This statement shows the changes in each type of stockholders' equity account and the total stockholders' equity during the accounting period. This statement usually includes:
- Preferred stock
- Common stock
- Issue of par value stock
- Additional paid-in capital
- Treasury stock repurchase
- Cumulative Translation Allowance (CTA)
- Retained earning
Components of Stockholders' Equity
InvestingStockholders’ equity represents the equity that shareholders own in a company.
InvestingFind out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
InvestingNegative shareholder equity on a company’s balance sheet is a red flag that should prompt potential investors to take a closer look before committing their money.
Managing WealthPreferred and common stocks are different in two key ways.
InvestingThe shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
InvestingAnalyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
InvestingA shareholder is a person, company or other entity that owns at least one share of a company’s stock.
Small BusinessAdditional paid-in capital is an account in the equity section of a balance sheet. It represents the additional amount paid for the company’s shares over the par value of the shares. Additional ...
Managing WealthConvertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
InvestingPaid-Up Capital is listed in the equity section of the balance sheet. It represents the amount of money shareholders have paid into the company by purchasing shares. It’s essentially two accounts, ...