Shareholder’s Equity Shareholder’s equity is the net assets of a corporation (Spiceland, 2011). There are two different types of shareholder’s equity: stockholder’s equity and owner’s equity. Shareholder’s equity pertains to corporations while owner’s equity pertains to sole proprietorship. Owners of a corporation are called stockholders or shareholders, because they own shares of the company’s stock. Shareholder’s equity is the way of showing how much money a company uses is financed through shares of the company.
The more money shareholders contribute to a company, the better a ompany will be able to operate. There are several reasons why people invest in companies. One reason is because he or she has a personal interest in the company and another is because he or she is investing money into the company in hopes of making a profit off of the sale of their shares. There are certain regulations that all companies must comply by that are set by the GAAP. Auditors are responsible for making sure companies are following these guidelines.
Calculating shareholder’s equity is very important for both management and potential investors. Management eeds to know how much money is being contributed into the company (Spiceland, 2011). Stock holders need to know if the company he or she is looking into is going to make a profit on the money they invest into a business. The most popular way to calculate shareholder’s equity is the simple equation, total assets minus the total liabilities. To find the fgure that should be used for the amount of total assets, both long term and short term assets should be added together.
Long term assets include equipment, property and capital assets that will be in used for many years. The urrent assets include receivables, work in process, inventory or cash. To compute the total liabilities, long-term and short-term liabilities are added together. Long-term liabilities are any debts that will require a repayment that may be longer than a year. The short-term liabilities include accounts payable and any other debits that are due with in a year.
After getting these two figures, you subtract the total liabilities from the total assets to get the shareholder’s equity. The shareholder’s equity can be classified in several different ways on a balance sheet depending on the type of ompany (Spiceland, 2011). A sole proprietorship, partnership, and other companies who do not sell stock to the public have several accounts grouped together called the retained earnings. These accounts are the owner’s equity and retained earnings accounts.
Owner’s equity line is where all of the contributions from the owner are found. Transactions that take place when an owner puts money into a company are a credit to owner’s equity and a debit to cash or equipment. The second account is the retained earnings. The retained earnings account is the net income of a corporation rom its inception until the balance sheet date less the dividends declared from its inception to the date of the balance sheet (Keiso, 2012). The retained earnings is calculated by subtracting expenses from the year so far from the total revenues.
A positive number for retained earnings shows that the company is earning a profit, while a negative shows the company is operating at a loss. A corporation has a companies make money from selling portions of the company to the public (Spiceland, 2011) . These accounts are common stock, preferred stock, paid-in-capital, and retained earnings. There are many advantages of a company selling stock. The main reason a company sells stock is because it allows a company earn more revenue without barrowing money that has to be repaid.
Once a company gets large enough, its stock can be sold on a public market so many people have access to buying a portion of the company. There are two types of stock: common stock and preferred stock (Spiceland, 2011). Common stock is the portion of a company that the public can purchase from the company. People who own common stock are able to elect the corporation’s directors. These stock holders are also able to receive istributions of a profit that a company makes in a year by a dividend. Dividends are the companies of sharing the profit of a company with the owners.
Distributions of dividends are not mandatory for a company to payout, but most companies send them out because it encourages people to continue to purchase from a company. Preferred stock is the stock that provides for preferential treatment of dividends. Preferred stock holders receive dividends before common stockholders (Glandon, 2010). Preferred stockholders typically receive a set amount of dividends per year. If a company is operating at a high profit, preferred stock holders receive less in dividends than a common stock holder.
If a company is not operating at a high rate, the preferred stock holders will receive a higher return than the common stockholders. There are several advantages and disadvantages to a company selling stock publically (Keiso, 2012). The advantage is that a company does not have to borrow all of the money they need to operate. The fact that the companies do not have to borrow money that they have to pay the money back and do not have to orry about paying an interest rate gives the company The second advantage is that company shares the risk.
Not one person has all of the financial responsibility if a company does not succeed. In summary, the shareholders equity portion of any company is very important. This shows the owners involvement in a company (Glandon, 2010). The stockholders equity of a company serves many different purposes with in each of the different types of business structures. Shareholder’s equity is very important to a company’s success because it allows a company to operate with out having to go out and borrow money.
There are many different ways an individual can own a part of a company. Buying stock on the stock market is one the best ways to earn money. People can easily buy and sell his or her stock whenever they want to. Resources Glandon, S. Chapter 18 Shareholder’s Equity 2010. Retrieved from http:// accounting. utep. edu/sglandon/c18/c18b. pdf Kieso, L. Chapter 16 Shareholder’s Equity. 2012. Retrieved from http://www. wiley. com/college/kieso/outline/out16. pdf Spiceland, J. D. , Sepe,J. F. , & Nelson, M. W. (2011). lntermediate accounting. (6th ed. ). McGraw Hill.