Equity Section of Balance Sheet | Components of Stockholders Equity

 

 

 

Equity Section of Balance Sheet | Shareholders’ Equity

Balance sheet is a statement; it is not an account.

Balance sheet is a representation of the financial position of an organization for specified date. 

It has liabilities and assets sides.

Liabilities are separated into stockholders’ equity plus liabilities.

It provides information about stockholders’ equity and claim of creditors in liabilities side.

It shows financial position of organization is assets side.

 

All debit balances are shown in assets and all credit balance are shown in liabilities side.

The lists should be arranged in headings in assets and liabilities side.

The balance sheet is a measurement of assets, liabilities and stockholders’ equity of a business entity on a given date.

 

 

Extracted Balance Sheet under IFRS

LIABILITIES AND EQUITY
Current Liabilities:
	Account payable
	Interest payable
	Other current liabilities
Non-current Liabilities:
	Long-term debt
	Other non-current liabilities
Shareholders’ Equity:
	Common stock
	Preferred stocks
	Additional paid–in capital-common
	Additional paid–in capital-preferred
	Retained earnings
	Less: Treasury stocks
	Total liabilities and equities

 

 

Extracted Balance Sheet under NFRS

EQUITY
	Common stock
	Preferred stocks
	Additional paid–in capital-common
	Additional paid–in capital-preferred
	Retained earnings
	Less: Treasury stocks
	Total Equity
LIABILITIES
Non-Current Liabilities:
	Long-term loan
	Other non-current liabilities
	Total non-current liabilities (a)
Current Liabilities:
	Creditors
	Interest payable
	Other current liabilities
	Total current liabilities (b)
	Total Liabilities (a+b)
	TOTAL EQUITY AND LIABILITIES

 

 

 

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Components of Stockholders Equity

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 firm’s assets and liabilities.

It is subdivided into four components:

     (a) Common stocks

     (b) Preferred stocks

(b) Additional paid-in capital (share or security premium)

(c) Retained earnings

(d) Treasury stock, if any.

 

Common stocks | Equity Shares

Common stock is also known as common stocks or ordinary shares.

Common stock is the base capital of a limited company or limited liabilities company (LLC).

Common stockholders have voting power in shareholder elections.

 

Preferred stock is also included in stockholders’ equity.

Preferred stock is issued only after issuing common stock.

Generally, preferred stockholders do not have voting rights to choose board of directors of the company.

They receive dividends from profits before common stockholders.

In the case of a company’s going to liquidation (wind up), preferred stockholders are given priority in claiming assets.

If the stock had a par value, the total par value of each class of stock is reported in a separate ‘par’ account.

 

 

Preferred stocks | Preference Shares

Preferred stocks are also called preference shares.

These stocks can be issued only after common stocks.

The persons who purchase preferred stocks are called preferred stockholders (preference shareholders).

Generally, these stockholders have preference rights in dividend received.

Dividend rates are pre fixed.

Preferred stockholders get dividend after interest on debenture but before common stockholders.

At the time of winding up, preferred stockholders get money after all the debts but before common stockholders. 

There are 8 types of preferred stocks.

 

 

Additional paid-in capital | Additional paid-in-capital in excess of par | Share or security premium

Additional paid-in capital is also known as share premium or contributed capital.

Additional paid-in capital is the amount paid in excess of the par value of both preferred and common stock.

Suppose, the par value of a stock is $100 but company issues it at $110.

Here, $10 is additional paid-in capital which is $110 issued price – $100 par value.

Additional paid-in capital may be on common stocks, preferred stocks and treasury stocks.

 

 

Retained earnings | Profit and loss appropriation account  

Retained earnings are the cumulative profits of the company.

It is the primary component of a company’s earned capital.

If there is any cumulative loss, it should be deducted from cumulative net income.

If company has declared cash dividend and stock dividend, they are also deducted from retained earnings.

This basic financial statement is important to the shareholders, the board of directors, potential investors and creditors.

 

Retained Earnings Statement

Particulars		Amount $	Amount $
Retained earnings  on 1 Jan 2021			xxxx
Add:	Net profit during the year		xxxx
Less:	Cash dividend and interim dividend	xxxx
	Stock dividend	xxxx
	General reserve (if given in adjustment)	xxxx
	Capital reserve (if given in adjustment)	xxxx
	Retained earnings  on 31 Dec 2021		xxxx

 

 

 

Keep in Mind

Stockholders’ equity (shareholders fund, permanent capital, net worth)
Common stocks	Retained earning	Less:
Preferred stocks	Profit and loss (Cr)	Preliminary expenses
Share premium	Dividend equalization fund	Profit and loss (Dr)
Share forfeiture	Sinking fund	Underwriting commission
Capital reserve	Compensation fund	Loss on issue of debentures
General reserve	Investment fund etc	Discount on issue of debentures etc
Reserve and surplus

 

 

Treasury stock

Treasury stock is the shares repurchased by the issuing firm and intended for resale to the public.

When a firm has a large amount of idle cash, the firm may choose to purchase some of its outstanding shares.

If the firm purchases a significant number of its own shares, firm’s earning per share may increase.

 

When the firm does not retire (redemption) those own purchasing shares, these shares are known as treasury stock.

It represents the difference between the number of issued shares and the number of outstanding shares. 

Treasury stock = Number of issued shares – Number of outstanding shares

 

In another words, treasury stock consists of shares issued but not outstanding.

Thus, treasury stocks are not included in earning per share or dividend calculations. 

Treasury stockholders do not have voting rights.

 

By buying back its stock, a firm reduces the number of shares outstanding which gives each shareholder a larger piece of earnings.

Similarly, the lower number of shares can improve EPS and other ratios.

 

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