Learning Outcomes
- Illustrate the balance sheet presentation of stockholder’s equity
Let’s take another look at the most current regulatory reports for The Home Depot, Inc. On page 33 of the 2019 annual report, the company reported the following components of stockholders’ equity:
See the balance sheet long description here.
Let’s take a look at a side-by-side comparison of a sole proprietorship’s owner’s equity and that of a corporation:
| Sole Proprietorship | Corporation |
|---|---|
| Capital contributions | Common stock, at par |
| Paid-in capital | |
| Net income less owner withdrawals | Retained earnings |
| Accumulated other comprehensive gain/loss | |
| Treasury stock |
It’s unlikely a sole proprietorship will be following all aspects of GAAP. It would be unlikely to include Other Comprehensive Gains and Losses unless a bank or other influential stakeholder[1] required full GAAP compliance. Other comprehensive gains and losses usually arise from changes in market value of short-term investments and adjustments that arise in translating information from subsidiaries that do business in other nations and therefore use other currencies (foreign currency translation).
In short, other than some differences in terminology and technical differences, the basic expanded version of the accounting equation still holds true:
A = L + E, where E = capital contributions − withdrawals + revenue − expenses.
For a corporation, it could be listed as:
Equity = paid-in capital from the sale of stock (par and in excess of par) − dividends and treasury stock + revenues and other comprehensive income − expenses and other comprehensive losses.
One final note: The balance in retained earnings is generally available for dividend declarations. Some companies state this fact. In some circumstances, however, there may be retained earnings restrictions. These make a portion of the balance currently unavailable for dividends. Restrictions result from one or more of these causes: legal, contractual, or voluntary. For instance, a contractual restriction may be the result of loan covenants. A voluntary restriction may be because of a board resolution. A legal restriction may be imposed as part of a lawsuit settlement. Companies generally disclose retained earnings restrictions in the notes to the financial statements.
In the next section, we’ll study the Statement of Changes in Stockholders’ Equity, but first, check your understanding of the balance sheet presentation.
Practice Question
- A stakeholder is different from a shareholder or stockholder. Employees, creditors, customers, government agencies, and a wide variety of other interested parties can be stakeholders. This means they have some kind of stake in the company and what it does (for instance, a not-for-profit concerned with the environment could be a stakeholder in a manufacturing firm). A shareholder/stockholder is an owner because they hold shares of stock. ↵
