Every publicly held company must compile and publish four basic financial statements -- the balance sheet, income statement, cash flow statement and statement of stockholders' equity. These documents are interlinked, with each statement complementing or fleshing out information provided in the others. The stockholders' equity statement, for example, provides context for numbers presented in balance sheets.
Accounting rules define stockholders' equity as the difference between the total value of a company's assets and the total amount of its liabilities. A company with $500 million in assets and liabilities totaling $450 million has stockholders' equity of $50 million. Think of it as what would be left over for the shareholders if the company decided to sell off its assets and pay off all its debts. Equity has two main elements: contributed capital, sometimes called "paid-in capital," which is all the money shareholders have paid into the company to buy stock; and retained capital, or retained earnings, which is the running total of all the profits and losses the company has reported over the years.
The fundamental difference between the balance sheet and the other statements is timing. Balance sheets provide a "snapshot" of a company's finances at a single point in time. The other statements cover a period of time between balance sheet dates -- a quarter or a year, for example -- and detail the company's activities during that period. In the case of the balance sheet and the equity statement, the balance sheet provides information about stockholders' equity on a specific date; the equity statement provides details about how the total amount of stockholders' equity changed between the time the last balance sheet was prepared and the current balance sheet date.
The balance sheet has three sections: assets, liabilities and equity. The "balance" refers to the fact that the total value of the company's assets always equals the amount of its liabilities, plus its stockholders' equity. The equity section of the balance sheet breaks down into contributed capital and retained capital and tells you exactly how much the company had of each on the balance sheet date. The contributed capital entries tell you how many shares of each kind of stock -- common and preferred -- have been sold to the public, and how much the company received for those shares. It also tells you how much money, if any, the company has spent to buy back shares from the public. The retained capital entries tell you how much of its profits the company has held onto, opposed to returning profit to shareholders as dividends.
The equity statement provides information about how equity has changed since the last balance sheet. Under contributed capital, it starts with the total amount of contributed capital at the beginning of the period, adds in any money the company received from selling shares during the period, and subtracts any money the company spent to repurchase shares on the open market. The result is the current figure for contributed capital -- which appears on the latest balance sheet. Under retained capital, it starts with the total amount from the beginning of the period, adds in the company's profit for the period or subtracts its loss for the period, and subtracts any dividends paid to shareholders during the period. The result is the current figure for retained capital, which also appears on the balance sheet.
Video of the Day
- "Financial Accounting for MBAs, Fourth Edition"; Peter Easton, et al; 2010
- AccountingCoach: Stockholders' Equity