Equity

Equity is the remaining balance of assets after the subtraction of all liabilities. Equity is the portion of the company’s assets owned by and owed to the owners. If the company were to be liquidated, equity represents the amount that would theoretically be distributable to the owners.

All business enterprises have owners’ equity, but the types of accounts in owners’ equity will differ depending on the type of the entity. The following discussion focuses on corporations, so the elements of owners’ equity discussed here are the elements of a corporation’s equity.

Owners’ equity for corporations is split into six different categories:

• Capital stock: The par or stated value of the shares issued.
• Additional paid-in capital: The excess of amounts contributed by owners from the sale of shares over and above the par or stated value of the shares issued.
• Retained earnings: Net income of the company that has not been distributed as dividends.
• Accumulated other comprehensive income items: Specific items that are not included in the income statement but are included in equity and adjust the balance of equity, even though they do not flow to equity by means of the income statement as retained earnings do.
• Non-controlling interest: A portion of the equity of subsidiaries that the reporting entity owns but does not own wholly.
• Treasury stock: Either the amount paid for shares that have been repurchased or the par value of shares that have been repurchased.11 Treasury stock is a contra-equity account that reduces equity on the balance sheet.

When a corporation repurchases shares of its own stock from the market, the repurchased shares are called treasury shares or treasury stock. Treasury shares purchased reduce owners’ equity, because those shares are no longer outstanding.