A company's statement of stockholders' equity encompasses several accounts, some of which depend on the structure of a particular company's business transactions. Stockholders' equity represents the difference between assets and liabilities on the balance sheet, showing the remaining equity after all liabilities are satisfied. It also documents the company's stock and earnings activity.
The capital stock term defines all of a company's stock held by investors. This includes common stock and preferred stock. Increases in a company's capital stock account are usually a positive signal. This means the company has issued more shares of stock, gaining money from new investors. The proceeds from the new stock sales may then support new machinery or projects that help the firm increase efficiency and make other changes that ultimately increase profits. This makes up a main component of stockholders' equity.
Retained earnings represents the amount of net income a firm has kept, or retained, each year since its inception. The balance is cumulative, and accountants update the balance with the earnings from each successive accounting period. When a firm pays dividends on its stock, the payments directly reduce retained earnings. This account resides in stockholders' equity, with the balance updated as an accountant transfers net income from the income statement at the end of each accounting period.
Stockholders' equity represents the amount of money investors have put into a firm. A company's balance sheet shows stockholders' equity in its own section, broken into its component parts. In addition to capital stock and retained earnings, stockholders' equity shows the amount of dividends paid. The total balance of stockholders' equity represents the amount to distribute among shareholders of the firm upon the firm's liquidation.
Stockholders' equity contains a few other accounts, depending on the type of transactions entered into by the company. For example, some firms choose to buy back some of their shares. An accountant records these repurchased shares into a shareholders' equity account called "treasury stock." This account acts as a negative offset to the balance of the common or preferred stock, depending on which type of stock the company repurchased. Stockholders' equity also may contain an "other comprehensive income" account, which accountants use to record other types of income not coming directly from the company's operations. Examples are unrealized changes in the value of investments, or gains and losses due to foreign currency fluctuations.
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