Stockholder’s equity comprises the third portion of the balance sheet, in addition to assets and liabilities. It reveals the amount invested into the company by the shareholders. It is the amount of capital received from investors in exchange for stock. Stock that has been sold is also known as paid-in capital. in order to determine stockholder’s equity, deduct the total liabilities from total assets.
Stockholder’s equity can be broken down into two major categories: paid-in capital and retained earnings. Retained earnings is the amount a company accumulates over time. It is the net income kept by the corporation rather than being given out to shareholders in the form of dividends. Sometimes it is reinvested into the company and other times it is used to pay off debts. The company may choose to restrict a part or all of of its retained earnings.
Common stock is issued at par value. It is the basic ownership of a company which gives the shareholder certain rights. Common-stock holders have a right to vote on important corporate matters. They have a right to share in any dividends. They also have a preemptive right to buy a proportional amount of any additional shares issued by the company. Common-stock holders receive periodic financial statements and get a share in the liquidation of the company after creditors and preferred-stock holders are offered the opportunity.
Preferred stock is also issued at par value. However, unlike common-stock holders, preferred-stock holders don’t have any voting rights in the company. They are not true owners. Dividends are usually paid each period as a percentage of the preferred stock’s par value. Preferred-stock holders are in line after creditors in the event of a company’s liquidation. The company also will buy back the stock from the shareholder at a set maturity date.
This is created when a company buys back its own stock and chooses not to retire it. On the balance sheet, treasury stocks are listed after retained earnings and deducted from contributed capital. If you’ve ever received stock options as a part of your compensation plan as an employee, most likely treasury stock was used for this purpose.