Stockholders' Equity and Owners' Equity

Owners' Equity refers to the contribution of investments of the owner and the result of business operation comes from income / sale and expenses or the profit and loss statement.

Owner's Equity also known as Stockholders’ Equity, Shareholders’ Equity, Net Worth, and Capital and commonly known with the following accounting formula:

      Asset                      =          Liabilities   +   Owner's Equity

Owner's equity refers to as the residual of assets minus liabilities.

     Owner's Equity        =          Assets   –   Liabilities

Owner's equity has different representation in each type of business in respect with the result of operation:

In a sole proprietorship or partnership, it is stated as the owners’ or partner's capital account

In a corporation, it is stated as retained earnings

Owner's equity can be increased in two ways:

Owner's equity is the measure of a company's net worth and is computed by subtracting total liabilities from total assets. It is also identified as shareholder's equity or book value and it comes from two main sources:

• Increase in owner’s capital contributions - Paid-in capital involves capital received from investors in exchange for stock in the company. The paid-in capital pertains to the amount that the corporation received when it issued its common and preferred stock. When the stock had a par value, the total par value of each class of stock is recorded in a separate "par" account.

• Increase in successful business operation or profit of business operation - Retained earnings represent the aggregate net income or successful business operation minus the dividends declared of the corporation.

The examples of Stockholders Equity are as follows:

•      Preferred Stock         
•      Common Stock
•      Paid-in Capital Stock
•      Treasury Stock
•      Retained Earnings

Preferred stock

Preferred stock has higher claim on the assets and earnings than common stock. The type of ownership in corporation which generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. It is also known as preferred shares.

Preferred shares holders entitle their full value in the liquidation of the company before common shares holders. Other type of preferred shares can be converted into common shares.

Common stock

Common stock refers to corporate equity ownership with security. They have the right to vote called voting share or ordinary share that can be used in other part of the world. Common shares can perform better than preferred shares or bonds over time. Common stock holders cannot be paid dividends until all preferred stock dividends including payments in arrears are paid in full.

Common stock investors receive nothing in the event of bankruptcy, unless there is remaining funds after creditors including employees, bondholders, and preferred stock holders are paid.

Common stock holders can able to influence corporation through votes to establish the corporate objective and policy, and electing the company's board of directors. There are many benefits of common stock include earning dividends and capital appreciation.

Treasury Stock

Treasury shares are shares of common stock that the issuing company has repurchased. In addition, reacquired stocks pertains bought back by the issuing company and reduce the amount of outstanding stock on the open market. It is also called government bonds or gifts. These accounts have always negative value and represent the company’s purchase of its own stock.

Treasury stock can be repurchase or buyback from shareholders; or it can never be issued to the public. These shares have no dividends, have no voting rights, and should not be included in shares outstanding calculations.

Three different treasury stock transactions: purchasing, selling, and retiring. The further details of the different transactions will discuss for the next articles.

Additional Paid in Capital (APIC)

These accounts refer to the value that is often included in the contributed surplus account in the shareholders' equity. The account represents the excess paid by an investor over the par-value price of a stock issue. Additional paid-in-capital can arise from issuing either preferred or common stock.

Paid in capital or contributed capital pertains to capital contributed to a corporation by investors through purchase of stock from the corporation. This account does not reflect the amount of capital contributed by any specific investor. Instead, it shows the aggregate amount of capital contributed by all investors.

Retained Earnings

Retained earnings refer to the portion of net income, which is retained by the corporation rather than distributed to its owners as dividends.

When the corporation got losses from the result of operation, the retained earnings take losses too. It means the retained earnings reduce at the end of accounting cycle. Retained earnings are cumulative from year to year with losses offsetting earnings.

Contra Owner’s Equity Accounts

Owner's equity and stockholders' equity accounts are both normally have credit balances. Contra owner's equity accounts are the classification of owner equity accounts with debit balances. The examples are as follows:

     Owner’s Equity contra account – Owner’s Drawings

     Stockholder’s Equity contra account – Treasury Stock

Owner's Equity or Stockholders’ Equity has Temporary Accounts

These are revenues, gains, expenses, and losses, which are income statement accounts. Revenues and gains are the source of owner's equity increase. When the company performs services, generate sales of product, and increases its assets, owner's equity will increase. Expenses and losses are the sacrifice cost to generate income resulted in owner’s equity or stockholders equity decrease. These temporary accounts will be closed to retained earnings or owners’ equity at the end of the normal accounting cycle or one-year business operation.