The owners’ equity portion of the balance sheet breaks down exactly what value the company has to its owners and how that value is allocated to them. The amount of value that investors have in a corporation is equivalent to the amount of total assets the company has minus its total liabilities.
In all cases, regardless of any other variables, debtors always get their cut in a company’s assets before investors. Just as you must take into consideration all the money you owe when calculating your personal net worth, so must every company. Owners don’t get anything until lenders get their money back.
Following are the subsections that fall under the owners’ equity portion of the balance sheet. The first three cover different types of stock, while the last three go over other types of earnings and income.
Preferred shares category of owners' equity
Company ownership is measured in shares of stock, but the types of stock vary. The first one listed on the balance sheet is called preferred shares. Preferred shares take precedence over all other types of stock in several different ways.
First of all, preferred stockholders are guaranteed dividends, which means they always get their payments before common shareholders get theirs. If the preferred holders don’t get their guaranteed dividends one year, those dividends accumulate into the next year.
Holders of preferred shares also get their full value in the liquidation of the company should it go out of business before holders of common shares get anything. Some types of preferred shares can be converted into common shares.
On the balance sheet, stock is treated a little differently than on the income statement because you need more details than just the type and amount of stock for the owners’ equity portion to be useful.
In addition to the exact type of stock (in terms of preferred shares, standard preferred or convertible preferred), the balance sheet must also list the percentage dividends guaranteed on preferred stock, the number of shares authorized, and the par value guaranteed to preferred shares in case of liquidation.
Common shares category of owners' equity
Like preferred shares, common shares give their holders the right to receive dividends and obtain company information upon request, but unlike preferred shares, common shares also come with voting rights that can influence company policy. The balance sheet treats common shares similarly to how it treats preferred shares in that the common shares section must list the number of shares outstanding, the number of shares authorized, and their par value.
Treasury shares category of owners' equity
Treasury shares are shares of common stock that the issuing company has repurchased. Companies often hold on to treasury shares in an attempt to drive up their own share price with the goal of reselling the shares at a profit. Companies aren’t required to list as much information about these shares on the balance sheet, but they do have to include total value of shares.
Additional paid-in capital category of owners' equity
The par value of a stock is originally set by corporations with contributions by their investment bankers at the initial public offering (the first time a specific stock is sold to investors as a company raises money).
The investment bankers determine the value of the company, which is used to establish the amount to be raised, and then divide that amount by the total number of shares to get the par value. During the initial public offering, shares are sold at no less than the par value, but investors often pay more as they try to outbid other investors.
Any amount that the company raises over par value contributes to the additional paid-in capital and shows up on the balance sheet as such.
Retained earnings
When a company earns income, that is to say when it makes money, that money either goes to the owner(s) of the company or is reinvested in the company. In either case, the money belongs to the company’s owner(s) and must contribute to the value of their ownership in the company.
For corporations, any money that doesn’t go to the stockholders in the form of dividends (which are reported on the income statement) is reinvested in the value of the company as retained earnings. Retained earnings consist of the money that a company makes after all expenses that it reinvests instead of giving to the stockholders.
Accumulated other comprehensive income category
Companies perform a number of transactions in the course of doing business that sometimes generate income on their own. Any assets generated in this manner that don’t appear anywhere else on the balance sheet show up as accumulated other comprehensive income. This income contributes directly to the equity of the stockholders. In other words, the owners own that money.