Question

Describe a Stockholder's Equity transaction.

Please explain In one or two paragraphs, please give an example (in the form of a journal entry with explanation) of a transaction which either increases or decreases Stockholder's Equity.

Please type response. And use clear examples.

Answer 1

Stock holders equity also known as shareholders equity. In the balance sheet, from company's viewpoint it depicts the amount owned by the shareholders of the company. Considering from the shareholders view point, Stockholders equity in the balance sheet shows the amount they are owning in the business after settling of all the liabilities and debts. In other words, Stockholders equity balance shows the remaining portion of assets remaining in the business after settling of all the liabilities. Stock holders equity consists of contributed capital i.e, share capital of its members and the retained earnings of the company over the years.

The transactions that affect or make changes to the balance that is either increase or decrease the stock holders equity is known as Stockholders equity transactions.

The transactions that affect the stockholders equity are mainly any buyback or sale of stocks, declaration and payment of cash dividends, changes in net income(loss) of the company etc.

Shareholders equity is calculated as-

Retained earnings + Paid-up capital + additional capital - treasury stock

Let us take an example,

Say a company ABC has the following balances-

	in Million	in Million
Common stock as on January 1 2020	200	..
Add Retained earnings as on January 1	50
Less Treasury stock	-
Stock holders equity as on January 1 2020		$250

ABC company declares dividend and pays off $20 milliont its shareholders. The net income of the company as on 31st December is $60 million dollars.

When company declares dividend the entry will be as

Retained earnings dr $20

Dividends payable. $20

Later when company pays in cash, entry will be as

Dividends payable dr $20

Cash. $20

Now the Retained earnings balance of the company as on 31st December was $110 million (opening+net income of current year) is being reduced to $ 90 million (less cash dividends paid).

The Stock holders equity balance is now as follows-

	in Million	in Million
Common stock as on December 31,2020	250
Add Retained earnings as on 31st December	90
Less Treasury stock	-
Stock holders equity as on 31st December, 2020		$340

The company's stock holders equity would have been $360 million if the cash dividend was not paid.

Here a payment of cash dividend decreased stockholders equity.