What is Owners’ Equity
Owners’ equity includes common stock and may include preferred stock—a security written with legal characteristics that combine aspects of debt and equity. Common stockholders are the owners of the company and thus, in most cases, are permitted to vote on important issues such as board representation. However, they are not entitled to claim the firm’s assets until all liabilities have been settled.
Reflecting their residual claim, under U.S. GAAP the owners’ equity section is listed after noncurrent liabilities on the balance sheet. Each of the following accounts is included in the owners’ equity section:
• The share (stock) accounts incorporate the firm’s transactions with its stockholders from issuing stock. They include the par value of shares (which is arbitrarily selected) and any additional capital (above par value) provided by shareholders when the shares were purchased. If the company has repurchased shares, this is typically reflected as a negative balance (an outflow from the company’s perspective) as treasury shares.
• Retained earnings, which represents all the company’s net income over time, less any dividends the company paid.
• Comprehensive earnings, which reflects changes in the value of equity that were never included on the income statement.
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
