Corporations are different from both sole proprietorships and partnerships in that they are considered independent entities separate from their owners. Corporate owners are called shareholders, because they hold shares in the corporation's capital stock, which is the sum of economic resources invested into the corporation by its owners. Stock shares can be both purchased on the open market from other investors or from the corporation itself at times. Common shareholders' equity is the portion of the corporation's equity that belongs to shareholders of its common stock shares.
A business's balance sheet lists its assets, liabilities and equity. Assets are the economic resources at the business's disposal, while liabilities are the economic obligations it owes to other entities as a result of its past transactions. Equity is the portion of the business's economic resources that its owners can claim. Assets are always equal to liabilities plus equity.
For corporations, equity is more often called shareholders' equity. Shareholders' equity is equal to assets minus liabilities or share capital plus retained earnings minus share buybacks. Share capital is capital invested in the business by shareholders who bought either common or preferred shares, while retained earnings are the business's accumulated profits that were reinvested in its operations. Share buybacks are, as their names suggest, shares that were bought back by the corporation.
Common and Preferred Shares
Different classes of shares offer their holders different benefits and responsibilities. For the most part, these classes can be divided into common or preferred shares. Common shares enable their holders to have some say in important decisions regarding the corporation through voting. In contrast, preferred shareholders have no say as to how the business is run but are entitled to a set amount of dividends every year.
Average Common Shareholders' Equity
Common shareholders' equity is calculated by subtracting preferred capital from total shareholders' equity. Average common shareholders' equity is calculated by adding common shareholders' equity at the beginning of the year to common shareholders' equity at year's end and dividing that sum by two. Average common shareholders' equity estimates the average amount of common shareholders' equity throughout the year.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.