What is Owner’s Equity?

Owners’ equity represents the excess of total assets less liabilities. It consists of four components: capital stock, additional paid-in capital, retained earnings, and minority interest.

Capital Stock

Capital stock includes the stated value, or “par value,” of all classes of a company’s stock. A company is legally obligated to keep on hand an amount equal to or greater than the aggre­gate par value of its shares.

• Preferred stock: Owners of preferred stock have special rights and privileges above those to which common shareholders are entitled. The privileges of preferred stock often include first priority to dividends (before common shareholders), cumulative dividends, and preferential treatment in the event of a company liquidation.
• Common stock: Common stock represents ownership in a company, inversely proportionate to the total number of shares of company common stock outstanding. Common stockholders have the right to vote for the board of directors, the right to subordinate receipt of company assets in liquidation, and the right to share in company earnings and dividends.
• Dividends: Dividends are cash amounts paid at specified time periods to owners of stock. Dividends are authorized and approved by the board of directors.
  • Declaration date: The declaration date is the date on which the board of directors announces that dividends will be paid, in what amount, and when the record and payment dates will occur.
  • Record date: The record date is the date on which the recipient must own the stock in order to receive the upcoming dividend. If the stockholder sells his or her stock before this date, the subsequent owner will receive the previously announced dividend.
  • Payment date: The payment date is the date when the dividend check is sent to the payee.
• Number of shares: A company can have a different number of authorized, issued, and outstanding shares. All of these amounts are disclosed on the company’s balance sheet.
  • Authorized shares: A company’s charter sets the number of shares that the company is authorized to sell. The board of directors can amend this amount with the approval of the shareholders.
  • Issued shares: Issued shares are shares that have been sold to the public. This amount can include shares bought back and held in the company’s treasury.
  • Outstanding shares: The number of shares actually outstanding is calculated as the number of issued shares, reduced by any shares held in the company’s treasury. As a result, outstanding shares represent the number of shares actually held by external owners.

Additional Paid-In Capital (APIC)

Additional paid-in capital is a residual account representing the amount of stockholder’s equity not otherwise classified as capital stock, minority interest, or retained earnings. APIC most commonly results from the excess of the amount paid for the company’s stock over its stated (par) value.

Retained Earnings

Retained earnings represents all income accumulated during the life of the company, reduced by amounts paid out as dividends to owners.

Minority Interest

A minority interest equity account can result from a business combination that does not result in 100% ownership of a subsidiary by a parent. Members of this ownership class are allocated proportional dividends and ownership benefits, as are the majority owners. However, this account continues as a separately stated equity account.