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Shareholders Equity

It also popularly known as stockholders equity is the residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities.

An artificial being created by operation of 3 law having the 4right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Advantages 1. Limited liability of stockholders. 2. Transferability of shares. 3. Continued life existence. 4. Greater source of funds. 5. Centralized management.

Disadvantages 1. Complicated in formation and operation. 2. Greater degree of government control and supervision. 3. Centralized managemnt. 4. Weakened credit standing. 5. Heavier income tax.

ABC CORPORATION PARTIAL BALANCE SHEET AS OF DECEMBER 31, 200X Stockholders' Equity Capital Stock, 10,000 shares authorized P 100.00 par, issued 5,000 shares Subscribed capital stock Less: Subscription receivable Additional paid-in capital: Revaluation increment in property Additional paid-in capital in excess of par value Additional paid-in capital from treasury stock Retained Earnings: Appropriated for treasury stock Unappropriated Total P 100,000.00 60,000.00 40,000.00 200,000.00

Capital stock

P 500,000.00 250,000.00 50,000.00 200,000.00 P 700,000.00


Retained earnings
Net Changes Reserve

30,000.00 100,000.00


Less: Net unrealized loss on noncurrent marketable securities Treasury stock at cost Total Stockholders' equity

10,000.00 20,000.00

30,000.00 P 1,000,000.00

Capital Stock

Par Value
Issued at Par Value Treatment: Cash/ other consideration xxx Capital stock xxx

No Par Value
Issued at Stated Value Treatment: Cash/ other consideration xxx Capital stock xxx

Issued Above Par Value Treatment: Cash/ other consideration xxx Capital stock xxx Additional paid in capital xxx

Issued Above Stated Value Treatment: Cash/ other consideration xxx Capital stock xxx Additional paid in capital xxx

Issued Below Par Value or Stated Value Cash or other consideration The discount on capital stock shall be treated as a Discount on capital stock receivable from the stockholders because capital stock can Additional pain- in capital. not be issued at a value lesser than its par value

xxx xxx xxx

Consideration Received The basis for the value of capital stock issued is the amount of cash received If the noncash consideration received is property or service rendered, the value of capital stock issued is equal to the value of the following order of priority: 1. Fair market value of noncash consideration received. 2. Fair market value of capital stock issued. 3. Par value of capital stock issued. The basis for the value of capital stock issued is the amount of liability set off.


Non Cash

Corporate shares of stock repurchased and held by the corporation itself. The debit balance account called Treasury Stock is reported in stockholders equity as a contra (reduces SE). Note: not an asset. The stock remains issued, but is no longer outstanding. Does not have voting rights and cannot receive cash dividends. May be reissued (to the market or to employees) or retired. No gains or losses are ever recognized from these equity transactions

Reissue to employees for compensation. Hold in treasury (or retire) to increase market price and earnings per share. Reduce total dividend payouts while maintaining per share payouts. Thwart takeover attempts by reducing proportion of shares available for purchase. Give cash back to existing shareholders.

Real or balance sheet account representing the accumulated income or losses of the corporation since its inception. Thus, it represents accumulation of net earnings reduced by net losses and dividends declared. Also, it is used to effect adjustments on equity due to changes in accounting policies and prior period error.

Retained Earnings DEBIT CREDIT 1.) Closing of income summary 4.) Clossing of income summary with debit balance. with credit balance. 2.) Appropriation for specific purposes. 3.) Declaration of dividends.

Unappropriated Retained Earnings. Portion of retained earnings which is available for dividends distributions to the stockholders either in form of cash, property or stocks. Appropriated Retained Earnings. This is not available for any dividend declaration because it is restricted for a specific purpose which the board of directors deemed necessary.

Statutory or legal restrictions. These are created based on the requirements of the law or the statute under which the company is incorporated. Example for this is appropriation for treasury stock. Contractual restriction. Previous contracts related to bond indentures frequently contain a requirement that retained earnings in specified amounts to be appropriated each year during the life of bonds. Example is appropriation for bonds retirement and for sinking fund. Existence of possible or expected loss. Reserve for estimated losses due to unfavorable contractual obligations, lawsuits or by way of other general contingencies. Protection of financial position. It maintains the company strong financial position. Best example is appropriation for plant expansion.

Financial report that shows the changes directly affecting the retained earnings of a corporation. Prior period errors. Includes inaccuracies resulting for mathematical error, mistakes in accounting application of oversight of facts that are known to accountant at the time of financial statement are prepared. Effect of change in accounting policies. Adjustments when the company shifts from one accounting principles to another. Net income or net loss for the period. Net income is added while net loss decreases the balance of retained earnings. Dividends to stockholders. Usually reduced the same upon dividends declaration. Current period appropriation. Reduce the retained earnings due to appropriation made by boards or requirement by law.

Part of unappropriated retained earnings distributed I in the form of cash or non-cash assets of the corporation to its stockholders as a return on capital

Category of Dividends
Return of capital. Liquidating dividends paid through use of capital invested by the owners. Return on capital. Most common purpose of distributing dividends.

Forms of Dividends
Cash Dividends. Dividends payable in cash. It is equal to cash declaration. Property Dividends. Dividend is payable in form of asset other than cash. Amount to be debited is equal to the book value of the assets. Stock Dividends. Shares to be issued as stock dividend are small (less than 20%) retained earnings is to be debited at market value of the shares issued., while if it is more that 20% retained earnings is to be debited at par.

Amount of earnings attributable to each share of common stock, it is income during the year assigned to each outstanding share of a corporation. It is used to indicate the attractiveness of common stocks as a n investment. Also, shows efficiency of the business to maximize resources in terms of generating income.

Basic Earnings per Share. Refers to fundamental computation of income assigned to each share of common stock without consideration to each share of common stock without considering corporate convertible share. Basic Earnings per Share = Net Income after tax Average outstanding common stock Diluted Earnings per Share. Refers to the computation of income assigned to each share of common stock with consideration to the corporate convertible shares.

Net income after tax should be reduced by dividends on preferred stock. In case if the preferred stock is cumulative, regardless whether there is declaration or not, only preferred dividends for the current period are allowed to be deducted from the income. On the other hand, if the preferred stock is non-cumulative, deduct preferred dividends only of there is declaration.

Portion of stockholders equity assigned to each common shares of stock outstanding.

Book Value per Share = Total Stockholders Equity Number of outstanding capital stock