Equity Accounts
Different types of equity that a business can issue and, when combined, become the total shareholder's equity.
What are Equity Accounts?
Equity accounts are different types of equity that a business can issue and, when combined, become the total shareholder's equity.
Equity account consists of common stock, preference stock, additional paid-up capital, retained earnings, treasury stock, and non-controlling interest (Minority Interest).
Equity is a share of ownership of an individual in any business and the amount to which he is entitled if the company was to be liquidated. In accounting, equity is the difference between the asset and the company's liability.
The formula for Shareholders’ Equity is
Shareholder’s Equity = Total Assets − Total Liabilities
As equity is a liability for a business, almost all equity accounts have a credit balance except the Treasury Stock account. Sometimes, retained earnings may have a debit balance, indicating that the business is posting a loss in its balance sheets.
Equity accounts are important to maintain for a business as they show how much the investors have invested in the business and track the growth of the business from that investment. It also helps in accounting for the ownership or shareholder structure of the business.
Key Takeaways
- Equity represents an ownership stake of an individual in a business.
- Shareholders equity consists of all the equity accounts that the business has issued.
- In accounting, shareholders' equity is calculated as the difference between total assets and total liabilities.
- There are different types of equity that a company can issue, which are accounted for in equity accounts of the business.
- Equity account consists of common stock, preference stock, additional paid-up capital, Retained earnings, Treasury Stock, and Non-controlling Interest (Minority Interest).
Types Of Equity Accounts
There are many accounts that a business can show on its balance sheet under shareholder equity. Some of these accounts are;
Common Stock, Preferred Stock, Retained Earnings, Additional Paid-up Capital, Treasury Stock, Common Stock Dividends Distributable, Stock Options or Stock Warrants, Accumulated Other Comprehensive Income (AOCI), Contributed Surplus, Capital Surplus.
This article will discuss the most prominent of these accounts that major publicly listed companies use. These are:
Common Stock
Common stock is the most common form of equity that a company can issue. It represents the owner's capital investment in the business.
A common stockholder is entitled to vote in a company's shareholder meeting and has a claim to the residual income and assets of the company.
Common Stock equity account value is usually recorded at the par value of the share times the number of shares outstanding. The balance sheet must also disclose the number of outstanding shares, equal to issued shares subtracted by treasury shares.
For example, Amazon has its common stock valued at $0.01 per share in par value, and as of January 25, 2023, Amazon has outstanding common stock numbered 10,247,259,757.
So Amazon will have an equity account of its common stock valued at $102,472,597 in its liability side of the balance sheet.
Preference Stock
Preference stock gives the holder preferential treatment in dividend payments but will not have any voting rights in most cases.
For example, a company has issued 500 preference stock with an accumulating dividend of a minimum of $5 per year. This means the company is liable to pay $5 every year to these 500 preference shares.
If, let's say, the company does not pay dividends for two years. Still, in the third year, it decided to pay a dividend of $5 to its shareholders. Then, before any other shareholders, the company will pay its preferred stock.
Which will have accumulated a total of $15 dividend per preference share, costing the company (500 x $15) $7,500 for three years, and will have to be paid before any other shareholders are paid.
Preference stockholders forgo their voting rights in return for getting this preferential treatment in revenue sharing, which is also a part of total shareholder equity and has a credit balance, meaning it comes in the liability side of the business's balance sheet.
Additional Paid-Up Capital
Additional paid-up capital is the difference between the share's par value and the share's issue price. In the example of Amazon’s common stock value, it was seen that the par value of Amazon shares was only $0.01 per share.
But at the time of writing this article (November 2023), the current trading price of Amazon stock is $127, so if Amazon wants to issue new shares, it will issue them for at least $100.
So, the difference between the face value of the stock of $0.01 and the issue price of $100 will be your additional paid-up capital, which, in this current example, will be $99.99 per share.
According to an SEC filing, Amazon, as of 31 December 2022, had almost $75,066,000,000 in its books under additional paid-up capital.
Retained Earnings
A business pays dividends to its shareholders after accounting for all its expenses and taxes. Still, sometimes, the business may decide to retain this profit for future investments and expansion of the business or to pay dividends at a later date due to tax implications.
This undistributed profit is labeled as retained earnings under the shareholder's equity head in the balance sheet.
Treasury Stock
When a company does a share buyback, the bought-back shares are recorded under treasury stocks in the business’s balance sheet.
As the company buys back the equity, the treasury stock account has a debit balance, a contra entry that reduces the share shoulders equity.
Share buybacks are done because dividends are taxed at a higher percentage as they are classified as business income.
For this reason, some companies decide not to pay dividends and buy back shares from their investors because this income is classified as capital gain income, which is mostly taxed at a lower rate.
Non-controlling stake
A Non-controlling stake represents the equity in a subsidiary company that the parent company does not own.
Non-controlling stake is an important accounting concept used in consolidated financial statements to represent the ownership stake in a subsidiary held by external or minority shareholders.
This ensures that the consolidated financial statements accurately reflect the parent company's economic interests and the subsidiary's non-controlling shareholders.
Types Of Equity Accounts FAQs
Equity is a share of ownership of an individual in any business and the amount to which he is entitled if the company was to be liquidated. In accounting, equity is the difference between the asset and the company's liability.
Equity accounts represent an individual's financial ownership in the company and are recorded on the liability side of the company's balance sheet.
There are different types of equity accounts that a company can have on its balance sheet, but the major 6 types are;
- Common stock
- Preference stock
- Additional paid-up capital
- Retained earnings
- Treasury Stock
- Non-controlling Interest (Minority Interest)
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