Term Paper Undergraduate 1,204 words

Stockholders' Equity: Common Practices and Account Types

~7 min read 5 sections Accounting · Intermediate Accounting

Abstract

This paper examines common accounting practices relating to stockholders' equity in corporations, using Google Inc. as a mini case study. It defines stockholders' equity as the residual interest in a company's assets after liabilities are deducted, then systematically explores the major equity accounts: common stock, additional paid-in capital, preferred stock, retained earnings, treasury stock, and accumulated other comprehensive income. The paper also discusses stock splits and stock dividends, explaining how each affects the balance sheet. Real figures from Google's financial statements between 2009 and 2013 are used throughout to illustrate theoretical concepts in practice.

Key Takeaways

Introduction to Stockholders' Equity: Definition, calculation, and book value concept
Types of Stockholders' Equity Accounts: Six equity accounts explained with Google data
Accumulated Other Comprehensive Income: Gains and losses from investment vehicles
Stock Splits: Effect of splits on shares and par value
Stock Dividends: Share issuance instead of cash dividends

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What makes this paper effective

Grounds abstract accounting concepts in a real corporate example — Google Inc.'s balance sheets from 2009–2013 — giving readers concrete figures to anchor each theoretical point.
Follows a clear, encyclopedic structure that moves logically through each stockholders' equity account before addressing special transactions such as stock splits and stock dividends.
Draws on peer-reviewed accounting journal articles for definitional claims, lending academic credibility to what is primarily a descriptive paper.

Key academic technique demonstrated

The paper demonstrates the technique of concept-to-application bridging: each equity account is first defined in general terms, then immediately illustrated with a real-world figure or observation from Google's financial statements. This move from abstract definition to specific evidence is a core skill in intermediate accounting writing.

Structure breakdown

The paper opens with a general definition of stockholders' equity and its significance. It then systematically enumerates the six major equity accounts (common stock, additional paid-in capital on common stock, preferred stock, additional paid-in capital on preferred stock, retained earnings, and treasury stock), with a short explanation and Google data point for each. Two standalone sections then address special equity transactions — stock splits and stock dividends — explaining their journal-entry implications and their effect (or lack thereof) on market value.

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Essay 1,204 words

Introduction to Stockholders' Equity

Stockholders' equity is a balance sheet item that represents the capital raised by investors in a business in exchange for stock. It consists of paid-in capital, retained earnings, and donated capital, and it represents the investors' stake in the company. Stockholders' equity is calculated by deducting the company's total liabilities from its total assets. Accounting experts commonly refer to stockholders' equity as the book value of the company, since it captures the funds originally invested by shareholders as well as any additional investments made thereafter (Lowe, 1961).

Stockholders' equity also captures earnings that a company has retained over time. For older companies — many of which began as small operations — retained earnings often represent the largest portion of stockholders' equity.

Types of Stockholders' Equity Accounts

There are several types of stockholders' equity accounts. The first is common stock, which is the portion of stock paid in by investors and is typically attributable to the par value of the stock. If the par value is minimal, the balance on this account is often small. Where the stock has no par value — for example, in a startup — this account is not used on the balance sheet.

The second account is additional paid-in capital on common stock. This represents the amount investors paid for common stock at a price above the stock's fair market value. This account is only used when state laws require the company to report the par value of the stock separately from the paid-in value in excess of par. This requirement exists to assess capital gains on the part of the company selling stock. Google reported Class A and Class B common stock and additional paid-in capital of $15 billion for the year ended 2009, growing to $25 billion by the year ended 2013 (Google Inc., 2013).

The third account is preferred stock. This contains the amount that investors pay for preferred stock in a company. Preferred stock refers to a class of ownership in which stockholders have a higher claim on the company's assets and earnings than holders of common stock. Dividends are always paid to preferred stockholders, while common stockholders may or may not receive dividends depending on the company's financial performance (Soo & Soo, 1994). Preferred stockholders also generally do not hold voting rights as common stockholders do. Google does not carry any preferred stock accounts on its balance sheet, indicating that no preferred stock has been issued (Google Inc., 2013).

The fourth account is additional paid-in capital on preferred stock. This is similar to the account for additional paid-in capital on common stock, except that it applies to preferred stock. It captures the prices paid by investors for preferred stock at amounts exceeding the stock's fair market value (Nurnberg, Stickney, & Weil, 1975).

The fifth account is retained earnings. This refers to the cumulative income a company has earned, less dividends paid out. Companies that report profits typically issue dividends at a certain percentage of profit and retain the remainder to finance future activities. These retained earnings form the amount the company uses to grow its capital base. Google's balance sheet illustrates this clearly: because the company has been profitable for several years, its retained earnings grew from $20 billion to $61 billion over a five-year period, and its total stockholders' equity grew from $36 billion to $87 billion over the same period (Google Inc., 2013). It is important to note, however, that a large retained earnings balance does not necessarily mean the company holds a large cash balance, since retained earnings may be partially deployed as capital expenditure.

The sixth account is treasury stock. This account is used when a company reacquires some of its own stock from shareholders, typically when it holds a large amount of idle cash and the market price of its stock is low. By buying back shares, the company reduces the number of shares available to trade, which tends to increase their value. When a company reacquires its stock, earnings per share increase, which can raise demand for the remaining shares and push the stock price higher. Treasury stock is a contra account to stockholders' equity, carrying a debit balance in the ledger (Ray, 1962).

Treasury stock can be recorded using either the cost method or the par value method. Under the cost method, stock reacquired by the company is debited to the treasury stock account and credited from the company's cash account (Sprouse, 1959). When the company subsequently sells its treasury stock, the amount sold is credited to the treasury stock account and the proceeds are debited to the cash account.

3 Sections Hidden · 315 words

Accumulated Other Comprehensive Income110 words

Some companies invest their cash and retained earnings in foreign currency, hedge funds, pension funds, and other investment vehicles. The gains or losses from these investments are recorded separately under…

Stock Splits95 words

When a company splits its stock — for example, in a 2-for-1 split — an investor who previously held 1,000 shares becomes the owner of 2,000 shares. The number of shares held by each stockholder doubles, while the…

Stock Dividends110 words

A stock dividend refers to the situation where a company issues additional shares to its investors instead of issuing cash dividends. A common example is a 10% stock dividend, where each stockholder…

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References

Google Inc. (2013). Consolidated balance sheets. Mountain View, CA: Google Inc.

Hunton, J. E., Libby, R., & Mazza, C. L. (2006). Financial reporting transparency and earnings management. The Accounting Review, 81(1), 135–157.

Lowe, H. D. (1961). The classification of corporate stock equities. The Accounting Review, 36(3), 425–433.

Maines, L. A., & McDaniel, L. S. (2000). Effects of comprehensive-income characteristics on nonprofessional investors' judgments: The role of financial-statement presentation format. The Accounting Review, 75(2), 179–207.

Nurnberg, H., Stickney, C. P., & Weil, R. L. (1975). Combining stockholders' equity accounts under pooling of interests method. The Accounting Review, 50(1), 179–183.

Ray, J. C. (1962). Accounting for treasury stock. The Accounting Review, 37(4), 753–757.

Soo, B. S., & Soo, L. G. (1994). Accounting for the multinational firm: Is the translation process valued by the stock market? The Accounting Review, 69(4), 617–637.

Sprouse, R. T. (1959). Accounting for treasury stock transactions: Prevailing practices and new statutory provisions. Columbia Law Review, 59(6), 882–900. https://doi.org/10.2307/1120241

Key Concepts in This Paper

Stockholders' Equity Retained Earnings Common Stock Treasury Stock Preferred Stock Paid-In Capital Stock Dividends Stock Splits Book Value Comprehensive Income