Stockholders' equity is one of the three major sections of a corporation's balance sheet. Stockholders' equity is the difference between the reported amounts of a corporation's assets and liabilities.
Stockholders' equity is subdivided into components: (1) paid-in capital or contributed capital, (2) retained earnings, and (3) treasury stock, if any.
The paid-in capital component reports the amounts the corporation received when it issued its common and preferred (if any) stock. If the stock had a par value, the total par value of each class of stock is reported in a separate "par" account. Any amount received that was greater than the par amount is reported in an account such as Premium on Common or Paid-in Capital in Excess of Par—Common Stock.
Retained earnings reports the cumulative net income since the start of the corporation minus the dividends declared since the start of the corporation. (In rare instances there may have been some adjustments to the balance of the retained earnings.) In effect, the retained earnings are the profits that the stockholders have opted to reinvest in the business. The amounts are likely to be invested in various assets and are not likely to be in cash.
Treasury stock (cost method) reports the amount paid by the corporation to purchase its own shares of stock. This account will have a debit balance and therefore reduces the amount of stockholders' equity.
The total of stockholders' equity is the book value of the corporation. You should realize that the book value or stockholders' equity is not an indication of the market value of the corporation.
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Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Read more about the author.