A business' net worth, which is its total assets minus its total liabilities, is often called owners' equity. If the business raises money by selling stock, the owners' equity is called stockholders' equity because all stockholders own a portion of the company. Businesses often list several categories of stockholders' equity to represent various financial calculations.
Types of Shares
There are two types of stock that may be listed as categories of stockholders' equity. Common stock is a type of stock that most companies sell, and ordinary investors may purchase this stock. Holding common stock gives an investor a partial ownership in the company and allows the investor to vote for the company's board of directors. Some companies also sell preferred stock. Preferred shareholders get their dividends first and are a high priority of if the company liquidates. These shareholders usually get a fixed dividend instead of a dividend based on company performance.
When a company purchases shares of its own stock for safekeeping, those shares of stock are called treasury stock. Sometimes a company sells some of its treasury stock. If the company sells the treasury stock for a profit, it records the profit as a credit balance to its shareholders' equity. This category of equity is called paid-in capital to treasury stock.
Premium on Common Stock
Common stock has a par value, which is the value each share of stock is actually worth. If a company sells common stock at a higher price than its actual value, the difference between the sale price and the stock's value is called a premium. Accountants list this category of stockholders' equity as the premium on common stock. If a company sells preferred stock at a premium, this premium is listed separately from the premium on common stock.
Every corporation must list its retained earnings on its balance sheet. Retained earnings are the money the corporation still has in its accounts after paying out dividends. Accountants usually list retained earnings as the net income the corporation has taken in since it opened, less the dividends the corporation paid out since it opened.