Corporations record value for the stockholders through the sale of common stock and through the money earned in its business operation. The sale of common stock occurs independently for privately held companies. For publicly traded companies, this is done by floating shares on a stock exchange. Retained earnings refer to money earned and kept for future activities. Companies that increase stockholder equity reduce the need to acquire financing by borrowing money. Common stock and retained earnings form the basis for stockholder equity in corporations. You can calculate the balance of retained earnings by considering the value of common stock.
1. Determine total asset value from reviewing the company's balance sheet. The assets appear first and communicate information regarding the items owned by the business. The assets provide benefits for the company either through the use of the asset, such as a building, or through the increase in value of the asset, such as an investment.
2. Determine total liability balance. The liabilities appear after the assets on the balance sheet. Every obligation owed by the company appears in this section, which includes both financial obligations and products or services owed to customers.
3. Calculate total stockholder equity value. The total stockholder equity balance equals the total assets minus the total liabilities. The total stockholder value consists of common stock and retained earnings.
4. Calculate the value of the common stock, which equals the total amount stockholders paid for the outstanding shares. This includes both common stock and paid-in capital on common stock. The common stock account represents the par value of the total shares outstanding, or owned by stockholders. The paid-in capital account represents the amount of money paid by the investors to purchase the stock beyond the par value of the stock.
5. Determine value of retained earnings. Subtract the value of common stock from the total stockholder equity value.