Balance sheet displays the company’s total assets, and how these assets are financed. It is based on below equation:
Assets = Liabilities + Shareholder's Equity
Shareholder’s Equity (or Equity) is the net amount of funds invested in a business by its owners. It is sometimes referred to as the book value of the company. It represents total equity interest of all the shareholders in the company.
Owner’s Equity are used on the balance sheet when the company is a sole proprietorship. If the company is a corporation, the words Stockholders’ Equity are used instead of Owner’s Equity.
Types of Shareholders Equity
Shareholders equity include
- Preferred equity: Preferred stock is the investment in the company by preferred stock holders. They have priority over common stockholders, company must pay them dividends before common stockholders. Preferred stock holders do not have any voting rights in the company. They usually do not share in the corporation’s earnings and instead receive only their fixed dividend.
- Common equity: It provide evidence of ownership in company. Holders of common stock have voting rights and elect the company board of directors. They share distribution of profits of the company via dividends.
- Treasury stock: It represent common stock that a company buys back from common shareholders or were authorised but was never sold to shareholders. They do not pay dividends, have no voting rights.
- Retained earnings: Profit a company has earned to date, less any dividends or other distributions paid to investors. This is an aggregate of undistributed profits across all years. Manager has discretion as to how much of the company profit, should be distributed to shareholders as dividends.
If the company were to liquidate, the secured lenders would be paid first, followed by unsecured lenders, preferred stockholders (if any), and lastly the common stockholders. Retained earnings are used to pay down debt or are otherwise reinvested in the company to take advantage of growth opportunities.