Definitions

Definitions

Equity

This is the residual interest in a company’s assets after deducting its liabilities. It is the expected amount that the owners of the company get after all liabilities have been paid.

Although it has a residual definition, it also has typical components:

Common stock	XX
Preference stock	XX
Additional paid-in capital (APIC)	XX
Retained earnings	XX
Accumulated other comprehensive income (AOCI)	XX
Less: treasury stock	(XX)
Equity attributable to the owners of the parent	XX
Non-controlling interests	XX
Total equity	XX

AOCI and non-controlling interests were discussed in previous chapters and will not be covered in this section. We will focus on the transactions affecting the following equity items:

• Paid-in capital
• Retained earnings

Paid-in capital

This consists of items that directly resulted from the contributions of owners. This covers transactions affecting the company’s

• Common stock
• Preference stock
• APIC
• Treasury stock

The next chapter, Transactions affecting paid-in capital, walks through the journal entries for each of these, including stock issuances and treasury stock repurchases.

Retained earnings

This consists of items that result from a company’s operations, also referred to as the company’s undistributed earnings. This covers transactions affecting the retained earnings account such as:

• Appropriation of retained earnings
• Dividends

The next chapter, Transactions affecting retained earnings, covers the journal entries for dividends and appropriations in detail.