Most investors know that they should carefully and periodically review the financial statements of the companies they own. The balance sheet is one of the major financial statements involved in this process, and investors are wise to pay close attention to the stockholder's equity part of this document -- it outlines the value of the money that's owed to them. Understanding what goes under the stockholder's equity component of the balance sheet is important to these investors.
The common-stock account is reported under shareholder's equity on the balance sheet. Common stock represents a share of ownership in the company and can be traded between shareholders. The value of common stock reported on the balance sheet only signifies the par value of the stock -- the value assigned by the company to the shares when the shareholder originally contributed capital. In some cases, the balance sheet may also report the number of shares of common stock that were issued or outstanding at the time the statement was prepared.
In addition to common stock at par value, the balance sheet also reports the amount of paid-in capital that exceeds the stock's par value. This is because actual cash value of a shareholder's investment in the company may not be proportional to the amount of the company's shares they own. The company may also receive more money from the investor than they return in stock, when shares are valued at par. On the balance sheet, the amount invested in excess of ownership shares -- at the par value -- is called paid-in capital.
When companies earn a profit, its managers and owners often decide to reinvest some portion of the earnings in business growth rather than distribute them to shareholders. This reinvestment is reported on the balance sheet under shareholder's equity as retained earnings. Retained earnings is the total amount of accumulated capital that the company has earned, minus any dividends provided to shareholders. Because of this, companies with a history of delivering strong profits will have a very large credit balance of retained earnings.
While the most common accounts under shareholder's equity are common stock, additional paid-in capital and retained earnings, some companies will list other sources of capital on the balance sheet. Among these is preferred stock and treasury stock, which are both shares of ownership in the company that have special conditions. Preferred stock may have the first right to dividends or assets, depending on the terms of the stock. Treasury stock represents stock that has been reacquired by the company from its shareholders in exchange for cash or other assets. Unlike common stock and paid-in capital, treasury stock has a debit -- or negative -- balance.
- Cliffs Notes: The Balance Sheet: Stockholders' Equity; 2011
- Nashville State Community College: Stockholder's Equity Section of the Balance Sheet; Laurie Swanson; 2011
- Accounting Coach: Common Stock; Harold Averkamp CPA; 2011
- Accounting Coach: Paid-in Capital or Contributed Capital; Harold Averkamp, CPA 2011
- American Institute of Professional Bookkeepers: Why Owners Love Their Retained Earnings Account--How to Handle it
- Jacksonville State University: Stock Transactions
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