Stockholder's equity refers to the net worth of a corporation. This amount represents the value of the company that belongs to the stockholders. If the company liquidated, the stockholders could expect to receive an amount reasonably close to this total. Stockholder's equity consists of several accounts, including retained earnings, capital stock and paid in capital. The retained earnings account refers to the profits earned and kept by the company to fund future activities. Capital stock and paid in capital refer to money contributed from stockholders in exchange for shares of stock. Some companies pay a rent expense in exchange for the use of a building or equipment. Other companies receive rent income in exchange for allowing another entity to use a building or equipment. Both rent expense and rent income impact stockholder's equity.
Businesses choose between renting facilities and purchasing them as they work to serve their customers. Many companies choose to rent either because they lack the financing to acquire the large assets or because they anticipate only needing the facility for a short time. These companies make rent payments to the landlord each month and record a rent expense in their financial records.
The net income of a company equals the total revenues minus the total expenses. When companies record a rent expense, their total expenses increase, causing their net income to decrease. At the end of the month, the accounting department zeros out all the revenue and expense accounts. The accountant then transfers the net income amount to the retained earnings account. The net income increases the value of stockholder's equity. As the expenses increase, the net income decreases. A lower net income means a lower increase in retained earnings or stockholder's equity.
When a company owns assets that are not being used, such as vacant buildings or spare equipment, it can rent these assets out to other entities. The company receives rent payments from these entities and records rent revenue in its financial records.
When companies record a rent income, their total revenues increase, causing their net income to increase. At the end of the month, the accountant transfers the net income amount to the retained earnings account, which increases the value of stockholder's equity. As the revenues increase, the net income increases. A higher net income means a higher increase in retained earnings or stockholder's equity.