Stockholders Equity Definition

31.05.2013

Stockholders Equity Definition

A statement of stockholders equity guides the reader about the transactions including cash receipt (from issuance of share) and payment (for dividend payment), made by the company owners and the rest of stockholders during the year. Shareholders or equity investors are the owners of the company. Stockholders affect some major decision of the company, including appointing a C.E.O., electing Managing Director etc. To elaborate more on stockholders equity definition consider below points.

Definition of Equity

Equity is an investment made by the external investors in the company. Investors are recognized with various names, like Stockholders, shareholders, owners etc. Generally, they receive two kinds of benefits from the company – one is dividend and the other one is capital gain. If the company makes profit during the year, it pays dividend. And if the value of investment or share price increases, stockholders get capital gain as well.  Let’s take an example; stockholder ‘A’ invests $1000 in the equity of a company. And he gets $100 dividend and $250 increase in the price of the share at the end of the year – in that case, the total benefit of ‘A’ is $350 during the year.

Statement of Equity

It is required to prepare four financial statements (statement of profit & loss, balance sheet, cash flows and statement of stockholders’ equity) by every company as per Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). statement of stockholders’ equity represents the common stock, preference stock, paid-in-capital, reserves & surplus, unrealized gain & loss on long term investment and adjustments for foreign currency transaction.

Importance

Statement of Stockholders’ Equity provides a pivotal part of financial information of an organization. Top level management constantly reviews two points in it – (1) Foreign currency translation adjustments and (2) Unrealized gain & loss on tong term investments. After reviewing the foreign currency translation adjustments stockholders can judge the currency risk for the company. As for unrealized gain & loss on tong term investments, they can identify the fluctuations in the long term investment such as investments on stock & bonds, which is subjected to changes. This unrealized loss will be actual loss only when the investment is sold out.

Time Frame

One most important point in statement of stockholder equity is time of recording of transactions related to equity. For example, if a company issues common stock, accountant will debit the cash & credit the common stock. Thereafter company will pay the proposed dividend when the time comes. After this step, accountant will credit the cash & debit the dividend payable.

Common, Preferred and Treasury Stock

In statement of stockholders’ equity, three types of shares are presented – common, preferred and treasury. Common stocks are the shares of ordinary type and shareholders of common stock hold the voting right in the company. Preferred stocks are the shares having preference in dividend payment compared to common shares but without voting right. Preference share could be of various types, e.g. convertible preferred stock, non-convertible preferred stock, redeemable, non- redeemable, accumulated, non-accumulated, different rate of dividend etc. Treasury stocks are the common shares repurchased by the company.

Conclusion

In short stockholders equity definition is ”Statement of stockholders equity guides the reader about the transactions of company related with owners of the company”

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