A company balance sheet must list assets and liabilities for the period to see how they balance out. In some cases the balance sheet must also account for stockholders' equity, to ensure that both sides are in balance. Stockholders' equity commonly exists when you’re accounting for a corporation.
Stockholders' equity is the value that a corporation’s owners have in the company. Expressed as a formula, it is simply assets less liabilities. For instance, if the company’s assets total $100,000 and its liabilities total $80,000, on the balance sheet stockholders' equity is $20,000. If the figure is zero, the company has no stockholders' equity. In some cases a company might even have negative stockholders' equity.
One element of stockholders' equity is paid-in capital. This is the money that a company took in when it sold its shares to investors. The two main classes of stocks are preferred and common. Common stock is the basic, standard issue of shares in the company. Shareholders who have preferred stock receive priority over common stockholders when it comes time for the company to send out dividend payments.
Another possible entry to account for under stockholders' equity is "treasury stock." This entry occurs after a corporation purchases its stocks back from shareholders, which reduces stockholders' equity.
The retained earnings that a company holds also makes up a portion of stockholder’s equity. Retained earnings include net profits that come into the business from sales. When the company receives a profit, it can decide to take the profit out of the business as cash, to distribute to owners and shareholders. But many companies instead choose to add the amount to retained earnings under stockholders' equity.
When dividends are paid to shareholders, this action is also accounted for under shareholders' equity in the balance sheet. A dividend payment reduces the amount of shareholders' equity, unless is it held and reinvested in the company as retained earnings going forward. In that case it is added to shareholders' equity. The company’s board of directors makes decisions regarding dividends.