The balance of shareholders' equity is shown on a company's balance sheet and represents the amount by which the company has been financed by its shareholders and the earnings that have accumulated to date, called "retained earnings." A company's equity balance is lowered by transactions such as the repurchase of stock and the payment of cash dividends to its shareholders.
When a corporation repurchases shares of common and preferred stock from investors, it uses its accumulated earnings and excess capital to fund the buyback, resulting in lower shareholders' equity. One reason a company may repurchase outstanding shares of stock is to distribute excess capital to its shareholders.
A company rewards its investors by distributing a portion of its profits in the form of cash dividends. Since the cumulative earnings of a company are reported within the balance sheet equity account "retained earnings," cash dividends are shown on the company's financial statements as a direct reduction of the account.
The balance in shareholders' equity represents the legal claims of a company's shareholders to the company's assets once its liabilities are paid. Increases in the company's outstanding debt on instruments such as bonds and notes will increase the creditors claim on the company's assets, thereby lowering shareholder's equity.
Depreciation is an operating expense that allows a business to allocate or spread the costs of its assets over the length of their useful life. The use of an accelerated depreciation method results in a higher depreciation expense during the asset's earlier years of service, resulting in a lower net income and equity balance during this time.
