Friday, 20 January 2012

Common Stock or Owner's Equity

Common Stock Definition:
Shares of common stock represent ownership of a public or private corporation. Shares of common stock usually give the shareholder voting rights. This means the shareholder can vote on matters of corporate policy and the selection of members of the board of directors. The more shares an investor owns, the more influence that investor has on the company.

Shares of common stock typically trade on financial exchanges and their values fluctuate according to the company’s performance and the market’s perceptions of the company.

If a company goes out of business and liquidates its assets, the common stockholders are the last ones to get their invested capital back. Bondholders and preferred stock holders are reimbursed before common stockholders.

Owner’s Equity Definition:
Owner's Equity defined: it represents the company’s net worth, or its assets minus its liabilities. It is is a section on the balance sheet. It also represents the owners’ interests in the assets of the company. Owners’ equity is also called stockholders’ equity and shareholders’ equity.

Owner's Equity Explanation:
Owners’ equity, explained simply, has two components: capital contributed from owners and shareholders, and profits earned by the company. Contributed capital refers to the funds raised by issuing stock to investors. The money investors paid to purchase shares of stock is contributed capital. The accumulated profits earned by the company are called retained earnings and are also included in owners’ equity.

The owners’ equity section of the balance sheet may include accounts such as common stock, preferred stock, additional paid-in capital, treasury stock (a contra-equity account), retained earnings, and other comprehensive income.

Owner's Equity Formula:
There are two ways to use the owner's equity formula:

Owners’ Equity = Total Assets – Total Liabilities

Owners’ Equity = Contributed Capital + Retained Earnings – Treasury Stock

Owner's Equity Calculation:
Owner's equity calculated:

Total Assets = $100,000
Total Liabilities = $50,000

Owner's Equity = $100,000 - $50,000 = $50,000


Contributed Capital = $200,000
Retained Earnings = $50,000
Treasury Stock = $50,000

Owner's Equity = $200,000 + $50,000 - $50,000 = $200,000

Owner's Equity Example:
Cynthia has a company, online, which makes custom t-shirts. Cynthia has worked hard, in both marketing and operations, to create a business which can sustain her lifestyle.

Cynthia initially took on some investment capital to start her business. She now wants to know total owner's equity. Cynthia looks at the owner's equity balance sheet column and performs the equation below.

Contributed Capital = $200,000
Retained Earnings = $50,000
Treasury Stock = $50,000

Owner's Equity = $200,000 + $50,000 - $50,000 = $200,000

Cynthia knows the value of the owner's equity statement in her financials. Her Owner's equity accounts tell her the amount of money shareholders have in her company.

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