4.9: Reporting Stockholder Equity

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Learning Outcomes

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the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.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.

Company A
Balance Sheet
Stockholders’ Equity
	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:

Company A
Balance Sheet
	Owner’s Equity
	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.

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Reporting Stockholder Equity. Authored by: Freedom Learning Group. Provided by: Lumen Learning. License: CC BY: Attribution