Businesses report financial information through various vehicles. One such vehicle is the balance sheet, which contains a snapshot of a company's assets, liabilities and stockholders' equity as of a given date. The difference between assets and liabilities equals stockholders' equity, a measure of the corporation's value to shareholders. The balance sheet specifies several account categories within stockholders' equity: capital accounts, retained earnings, treasury stock and accumulated other comprehensive income.
The capital account component of stockholders' equity allows a corporation to disclose how much money it has raised by issuing equity securities: common stock, preferred stock, and warrants. The stock accounts divide the proceeds into par value and additional paid-in capital. Par is a nominal share value that many states require. For example, suppose a company issues one million common shares, each with a par value of $0.01, for $20 a share. The company debits the cash account for $20 million, credits the common stock account for (1 million x $0.01 par), or $10,000 and credits the additional paid-in capital stock account for $19,990,000.
The capital accounts also include certain equity derivatives -- securities that can convert into stock. For example, some companies issue stock warrants, which are long-term options on common or preferred stock. A warrant gives its owner the right, but not obligation, to buy a set number of shares on or before an expiration date at a fixed price, called the exercise price. The value of the capital account for warrants is equal to the exercise prices times the shares per warrant.
The retained earnings account of the stockholders' equity section reports the amount of profit the company has kept within the company since its inception. Corporations can use retained earnings to pay for cash dividends, capital projects, and other purposes. At the end of each year, a company adds its net income to, or subtracts its net loss from, the retained earnings account. Companies can also use retained earnings to buy back stock in the open market. The company reports this treasury stock at its cost and subtracts it from the other components of stockholders' equity.
Accumulated Other Comprehensive Income
The accumulated other comprehensive income, or AOCI, account reports a special class of income that isn't included in net income. The types of income included in AOCI reflect transactions that have yet to conclude. Examples are the unrealized translation profit from foreign currency transactions and the current value of security investments. When an AOCI transaction closes, the company transfers the value from the stockholders' equity section of the balance sheet to the income statement.
Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.