Describe the presentation of stockholder’s equity on the balance sheet and statement of owners’ equity
You have learned that the accounting equation is presented as Assets = Liabilities + Equity. Let us take a closer look at the Equity portion of that equation and how it is presented on the Balance Sheet and the Statement of Owners’ Equity.
Stockholders’ Equity (also known as Shareholders Equity) is an account on a company’s balance sheet that consists of capital plus retained earnings. When the business is not a corporation and therefore has no stockholders, the equity account will be reflected as Owners’ Equity on the balance sheet.
In short, the Equity portion of the accounting equation is the amount left over after liabilities are deducted from assets and represents the residual value of assets minus liabilities. Owner’s or stockholders’ equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners. When there are shareholders this distribution comes in the form of dividends. Let’s look at the expanded accounting equation to clarify what constitutes Owners’ or Shareholders’ Equity before we examine its presentation on the Balance Sheet and Statement of Owners’ Equity.
For a corporation with shareholders the accounting equation is:
Assets = Liabilities + Paid-in Capital + Revenues – Expenses – Dividends – Treasury Stock
For a sole proprietorship or a company without shareholders the accounting equation expands to be:
Assets = Liabilities + Owner’s Capital + Revenues – Expenses – Owner’s Draws
As you can see, Equity includes several components regardless of the type of business.
The figure below is an example of how Equity is reported on the Balance Sheet of a corporation when stock has been issued.
|Paid in Capital||$ 2,500,000|
|Preferred Stock||$ 2,500,000|
|Common Stock||$ 4,500,000|
|Paid-in capital I excess of par value – preferred||$ 1,550,000|
|Paid-in capital in excess of par – common stock||$ 2,850,000|
|Paid-in capital from treasury stock||$ 952,000|
|Retained Earnings (Revenues – Expenses)||$ 2,458,000|
|Accumulated other comprehensive income||$ 3,525,000||$ 20,835,000|
|Less: Treasury Stock||$ 2,895,000|
|Total stockholder’s equity||$ 17,940,000|
For a company that has not issued stock and is privately held, the statement of equity on the balance sheet will be presented as follows:
|Beginning owners’ equity||$ 245,000|
|+ Owners capital investments||$ 27,000|
|+ Gross Revenue||$ 258,000|
|– Expenses||$ 189,000|
|– Owners’ withdrawals||$ 56,000|
|Total Owner’s Equity||$ 285,000|
What both statements have in common is that they include the net income information from the company’s income statement! Remember, equity is simply the difference between the company’s assets and the liabilities the company has taken out against those assets.