- How Do Common Stocks Affect Retained Earnings?
- What Are the Elements That Must Be Included in the Equity Section of a Balance Sheet?
- How to Calculate the Retained Earnings in Stockholder Equity With Common Stock
- Total Stockholders' Equity Calculation
- Does Equity Appear on the Income Statement?
- Where Is Common Stock Dividend Distributable On a Balance Sheet?
Companies offer shares of stock for sale as a means to finance projects, such as growth expansions or new product lines. In the process of issuing stock, companies also hand over a portion of their equity holdings to shareholders. Shareholder distributions rely on the success of the company in terms of net profits made. And while net profits increase a company’s cash equity, shareholder distributions determine how bookkeepers allocate equity holdings.
Assets & Equity
Assets, liabilities and equity holdings appear on a company’s balance sheet records. Assets include cash, stock shares, monies owed to the company and physical items such as property and equipment. Liabilities include any outstanding debts, such as taxes due, loans and bond issues. Accountants subtract the total liability amount from total asset amount to determine how much equity exists in the business. In effect, net assets represent the amount of equity or ownership the owners have in a company. With the purchase of company shares, shareholders add to a business’ available capital in exchange for part ownership in the company. As part owners, this entitles shareholders to a portion of any profits made. Shareholder distributions represent a percentage of profits made by the business.
Balance Sheet Records
A balance sheet provides a record of accounts that track a company’s assets and liabilities. Within the assets portion of a balance sheet, companies track net assets (or equity) through a separate account listing, known as the retained earnings account. For companies that sell shares of stock, shareholder stock provides a source of contributed capital that appears as a separate asset account on the balance sheet. So, whenever shareholders receive distributions on profits made, the cash equity amount listed within a retained earnings account decreases. Since shareholder distributions involve periodic cash payouts, stock issues also fall within the liability portion of a company’s balance sheet records. By listing share issues and distributions on both the asset and liability accounts, businesses can keep track of cash flow transactions as they occur.
With each accounting cycle, a company’s balance sheet will show an increase or decrease in cash equity based on any net profits or losses that occur. In effect, cash equity functions as a reservoir for the business’ ongoing operations and as the source for shareholder distributions. Bookkeepers use a debit and credit system when tabulating the effects of a shareholder distribution. Balance sheet records show net profits on the retained earnings statement as a credit under the shareholder equity account. Under the liabilities account, actual shareholder payouts appear as a credit since paying out a distribution means the company owes less in terms of liability.
Companies with limited or low cash equity reserves may opt to issue stock dividends in the place of cash payouts or dividends. Instead of cash dividends, shareholders receive an increase in share holdings, typically in the form of “pieces” or fractions of single shares. So, a 5 percent stock dividend would distribute .05 shares for each single share held by a stockholder. Rather than decrease a company’s cash equity, stock dividend distributions reduce retained earnings, which affects the amount of equity owners have in the company. In effect, an increase in stock shares becomes an increase in contributed capital, meaning an increase in overall company assets. To account for the distribution, bookkeepers have to move or re-allocate equity holdings from the retained earnings account to the contributed capital account.