Question

Please describe the sections of the statement of stockholders equity. Search for an example of such a statement and include this in your post.

Answer 1

Sections of the statement of stockholders equity: -

Stockholders Equity is influenced by several components:

1. Share Capital – amounts received by the reporting entity from transactions with its owners are referred to as share capital.
2. Retained Earnings – amounts earned through income, referred to as Retained Earnings and Accumulated Other Comprehensive Income (for IFRS only).
3. Net Income & Dividends – Net income increases retained earnings while dividend payments reduce retained earnings.

1.) Share capital

Share Capital refers to amounts received by the reporting company from transactions with shareholders. Companies can generally issue either common shares or preferred shares. Common shares represent residual ownership in a company and in the event of liquidation or dividend payments, common shares can only receive payments after preferred shareholders have been paid first.

If a company were to issue 10,000 common shares for $50 each, the contributed capital would be equal to $500,000. The journal entry would be:

DR Cash          500,000

CR   Common Shares             500,000

(Being Shares issued)

2 Retained Earnings

Retained Earnings (RE) are a business’s profits that are not distributed as dividends to stockholders (shareholders) but instead are allocated for investment back into the business. Retained Earnings can be used for funding working capital, fixed asset purchases, or debt servicing, among other things.

To calculate retained earnings, the beginning retained earnings balance is added to the net income or loss and then dividend payouts are subtracted. A summary report called a statement of retained earnings is also maintained, outlining the changes in retained earnings for a specific period.

The Retained Earnings formula is as follows:

Retained Earnings = Beginning Period Retained Earnings + Net Income/Loss – Cash Dividends – Stock Dividends

3.) Dividend Payments

Dividend payments by companies to its stockholders (shareholders) are completely discretionary. Companies have no obligation whatsoever to pay out dividends until they have been formally declared by the board. There are four key dates in terms of dividend payments, two of which require specific accounting treatments in terms of journal entries. There are various kinds of dividends that companies may compensate its shareholders, of which cash and stock are the most prevalent.