Understanding Balance of

Stockholders Equity
Product of BKMSH

Understanding Balance of
Stockholders Equity
The balance sheet sums up the financial health of an entity at a specific financial period by detailing its
assets, liabilities, and equity. By comparing and contrasting the beginning owners equity with the ending
owners equity, the user of the financial statement will know if the capital for that accounting period was
extended or abated.
According to the Financial and Accounting Standards Board, the items to be reported on the balance
sheet, and in any other financial statements, must be measurable, relevant, and reliable. The balance
sheet contains three elements: assets, liabilities, and stockholders equity.

The Stockholders Equity

It should be remembered that;
Assets = Liabilities + Stockholders Equity where;
Stockholders Equity = Assets - Liabilities
After the liabilities have been subtracted from the assets, the remaining interest in the assets of an entity
is called the stockholders equity or the net assets. In the balance sheet, these are the assets claimed
by the owners of the company.
In general, the stockholders equity section on the corporation's balance sheet contains the paid-in
capital, retained earnings, other accumulated comprehensive income (loss), and treasury stock.

Paid-In Capital
Sometimes ascribed as contributed capital, the paid-in capital represents the amount of investment an
owner has in a business. Paid-in capital can also be described as the amount paid by stockholders in
exchange for shares of ownership.
There are three categories of paid-in capital: common stock, preferred stock, and additional paid-in
capital.

Common Stock
In situations wherein no other classes of stocks are authorized, common stock is referred as capital
stock. Basically, it represents retained ownership.
Common stockholders are considered as the absolute owners of the corporation. As such, they have
control of residual assets. In the event of bankruptcy, their obligations are circumscribed on the amount
of their investment. They are not compelled to increase their investment in order for the business to
compensate for its losses. Responsibilities of common stockholders include electing members of the
board of directors, authorizing transactions such as mergers, and ratifying changes in the corporate
charter.
15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Understanding Balance of
Stockholders Equity
Common stock can either be of par value or of no-par-value. Par value is the designated minimum
amount of each share, as described in the corporate charter.
On the balance sheet, the numbers of shares of stocks authorized, issued, and outstanding are
indicated. The authorized shares are the maximum allowable shares a corporation can issue. Issued
shares are shares that have been sold or turned over to stockholders. It should be noted that this does
not imply that the shares are outstanding in nature. Outstanding shares are shares that are currently
in possession of the stockholders.

Preferred Stock
What makes preferred stock distinct from a common stock is its debt-like characteristics. Moreover, it
pertains to dividends or the sharing of the corporations income to its owners. In situations like
liquidation, preferred stockholders have bounded claim on assets.
Dividends under preferred stocks have cumulative, participating, convertible, or callable characteristics.
In the event that no dividend is declared in one year, the dividend on the preferred stock will be
regarded as a debt, therefore the dividend is cumulative. This must be settled first before ensuring
common dividends are distributed.
If there is a very large dividend in a year, the excess dividends will be distributed among the common
and preferred stockholders in a specified ratio on top of the preferred and common stockholders usual
dividends, ergo the dividend is participating.
From the name itself, a convertible dividend can be converted or transformed into a common stock. In
this way, stockholders are given the option to increase their returns through a common stock or the
advantage of lower risk with a preferred stock.
A callable dividend can be redeemed at the discretion of the corporation.
On the balance sheet, the preferred stock contains information on the par value and dividend rate;
liquidating value or redemption value; and the shares issued, retained, and sanctioned by the corporate
charter.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Understanding Balance of
Stockholders Equity

Additional Paid-In Capital

Sometimes referred as capital in excess of par value, stated value, and capital surplus, an additional
paid-in capital shows the excess amount obtained by the owner from selling preferred or common
stock.

Retained Earnings
Retained earnings or earned capital is the amount of net earnings of a company throughout its
operations that are not paid out as dividends. From an economic perspective, the difference between
paid-in capital and retained earnings is that paid-in capital is the amount paid for the stocks or shares of
the company while the retained earnings are the gained capital retained for future use.
In defining the owners equity section on the balance sheet, it should be noted to keep the disparities
between paid-in capital and retained earnings.

Other Accumulated Comprehensive Income(Loss)

Based on the released Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, by the Financial Accounting Standards Board (FASB), accumulated other
comprehensive income (loss) covers the accruing adjustments in foreign currency translation, gains or
losses on particular derivative instruments, latent gains or losses on investments that are ready to be
sold, and variations during the time in earlier service costs and net actuarial gains or losses relative to
the post-retirement and pension plans.

Treasury Stock
A study guide from the California State University, Long Beach described treasury stock as the
corporations own stock that has been issued, fully paid for, repossessed by the corporation, and
retained in its treasury for eventual use.
Corporations acquire treasury stock for various reasons. It can be used to curtail the number of
outstanding shares in order to expand the earnings per share or use it to get rid of antagonistic
shareholders by buying them out. Furthermore, treasury stock can be reissued to employees and
executives as a bonus or stock compensation.
Generally, there are two methods in accounting the treasury stock. It can be via cost method or par
method. The cost method debits the treasury stock by the cost to repossess the shares while par
method debits the treasury stock by the quantity of acquired shares multiplied by the par value.
Between the two, the par method is ideal since it keeps the relationship of the stock accounts and
paid-in capital in excess of par.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com