Читать книгу Financial Accounting For Dummies - Maire Loughran - Страница 43

Equity shows the owners’ total investment in the business, which is their claim to the corporate assets. As such, it shows the difference between assets and liabilities. It’s also known as net assets or net worth. Examples of equity are retained earnings and paid-in capital. I fully discuss both equity accounts in Chapter 9. For now, here’s a brief description of each:

 Retained earnings: This account shows the result of income and dividend transactions. For example, the business opens on March 1, 2021. As of December 31, 2021, it has cleared $50,000 (woohoo!) but has also paid $10,000 in dividends to shareholders. The retained earnings number is $40,000 ($50,000 – $10,000).Retained earnings accumulate year after year — therefore the “retained” in the account name. So, if in 2022 the same business makes $20,000 and pays no dividends, the retained earnings as of December 31, 2022, are $60,000 ($40,000 + $20,000).

 Paid-in capital: This element of equity reflects stock and additional paid-in capital. Nope, you’re not seeing a typo! There is a paid-in capital account called “additional paid-in capital.” In brief, here’s what the two types of equity are:Stock: Corporations raise money by selling stock — pieces of the corporation — to interested investors. Stock sold to investors usually comes in two different types: common and preferred. Each type of stock has its own characteristics and advantages, which I discuss fully in Chapter 9.Additional paid-in capital: This equity account reflects the amount of money the investors pay over the stock’s par value. Par value is the price printed on the face of the stock certificate and quite often is set at a random dollar amount. For example, if the par value of JMS, Inc. stock is $10 per share and you buy 100 shares at $15 per share, additional paid-in capital is $500 ($5 times 100 shares).

There is another stock account: Treasury stock is a company’s own stock that it buys back from its investors. While treasury stock is a part of equity, it is not a part of paid-in capital. It shows up on the balance sheet as a reduction in equity.