Definition of Stockholders’ Equity
Stockholders’ equity (also known as shareholders’ equity) is reported on a corporation’s balance sheet and its amount is the difference between the amount of the corporation’s assets and its liabilities.
Generally, stockholders’ equity consists of the amounts the corporation had received from the sale of its common and preferred shares of stock plus the earnings of the corporation minus any distributions to the stockholders. In other words, stockholders’ equity is one source of the corporation’s assets. (The other source are the corporation’s creditors as evidenced by the liabilities.)
Stockholders’ equity and liabilities are also seen as the claims to the corporation’s assets. However, the stockholders’ claim comes after the liabilities have been paid.
Stockholders’ equity is also the corporation’s total book value (which is different from the corporation’s worth or market value).
Components of Stockholders’ Equity
The amount of stockholders’ equity is reported on the balance sheet as follows:
- Paid-in capital. This is the amount that the corporation received when it issued shares of its capital stock with common stock and preferred stock (if any) reported separately.
- Retained earnings. Generally this is the cumulative earnings of the corporation minus the cumulative amount of dividends declared.
- Accumulated other comprehensive income. This is the cumulative amount of income (or loss) for a few items that are not reported on the corporation’s income statement.
- Treasury stock. This is a reduction of stockholders’ equity for the amount the corporation paid to purchase but not retire its own shares of capital stock.
The changes which occurred in stockholders’ equity during the accounting period are reported in the corporation’s statement of stockholders’ equity.
