Introduction
Shareholders’ equity refers to the portion of a company’s total assets that is attributable to its shareholders. It represents the residual interest in the company’s assets after deducting liabilities. In this article, we will explore which accounts are classified as shareholders’ equity.
Common Stock
Common stock is a primary component of shareholders’ equity. It represents the ownership interest in a company held by its common shareholders. Common stockholders have voting rights and are entitled to a share of the company’s profits in the form of dividends. The value of common stock is typically recorded at par value, which is the nominal value assigned to each share.
Preferred Stock
Another account that falls under shareholders’ equity is preferred stock. Preferred stockholders have a higher claim on the company’s assets and earnings compared to common stockholders. They receive a fixed dividend payment before any dividends are distributed to common stockholders. Preferred stock may also have other features, such as conversion rights or cumulative dividends.
Additional Paid-in Capital
Additional paid-in capital represents the amount of capital that shareholders have contributed to the company above the par value of the stock. When a company issues stock at a price higher than its par value, the excess amount is recorded as additional paid-in capital. This account reflects the amount of capital raised through stock issuances that exceeds the nominal value of the stock.
Retained Earnings
Retained earnings is the cumulative amount of a company’s earnings that have not been distributed to shareholders in the form of dividends. It represents the portion of profits that the company has retained for reinvestment or to cover future obligations. Retained earnings increase when a company generates net income and decrease when dividends are paid out.
Treasury Stock
Treasury stock refers to shares of a company’s own stock that it has repurchased from the open market or from shareholders. These repurchased shares are held by the company and not considered outstanding. Treasury stock is recorded as a reduction in shareholders’ equity because it represents a decrease in the ownership interest of the company’s shareholders.
Conclusion
In conclusion, the following accounts are classified as shareholders’ equity: common stock, preferred stock, additional paid-in capital, retained earnings, and treasury stock. These accounts reflect the ownership interest of shareholders in a company and provide valuable information about the financial health and capital structure of the organization.
References
– Investopedia: www.investopedia.com/terms/s/shareholdersequity.asp
– AccountingTools: www.accountingtools.com/articles/what-is-shareholders-equity.html
– Corporate Finance Institute: corporatefinanceinstitute.com/resources/knowledge/accounting/shareholders-equity/
