Included among the financial statements a business prepares to demonstrate its financial well-being is its balance sheet. A balance sheet shows that the sum of a company’s assets equals the total of the company’s liabilities plus the equity held by its stockholders or owners. A stockholder’s equity increases or decreases in concert with both transactions conducted by a business, and the company’s recognition of a net profit or loss at the end of a given period.
A balance sheet reports stockholders’ equity as the residual or difference that remains after a company subtracts its liabilities from its assets. A balance sheet typically classifies stockholders’ equity as the sum of paid-in capital, retained earnings and treasury stock. A balance sheet can itemize common stock, preferred stock and paid-in capital in excess of par under the paid-in capital classification.
Because a stockholders’ equity is included in the balance sheet, any transaction that affects the assets or liabilities can also have an impact on stockholder’s equity. For example, if a business settles a debt obligation, the total of the liabilities recorded on the company’s balance sheet will decrease. For the balance sheet to remain balanced, stockholders’ equity will increase proportionately as a result.
A business prepares an income statement at the end of an accounting cycle to determine whether the business earned a net profit or incurred a net loss during the period. A balance sheet reflects the results recorded on an income statement within the retained earnings classification. If a business reports a net profit from its operations, the company’s balance sheet will record a corresponding increase in stockholders’ equity as retained earnings.
If a company sells common stock in exchange for cash or another asset of value, its balance sheet adjusts the amount of stockholders’ equity. If a person pays more for a company’s stock than the stock’s par value, a balance sheet records an increase in stockholders’ equity as paid-in capital in excess of par value. If, on the other hand, a business repurchases stock it issued on a prior occasion, the company’s balance sheet reduces stockholders’ equity by the amount spent to buy the treasury stock. If a company resells its treasury stock, the company’s balance sheet will record an increase in stockholders’ equity as additional paid-in capital.
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