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Equity - The Accounting Equation For Every Business
Equity - The Accounting Equation For Every Business
- "stocks" is the more general, generic term. It is often used to describe a slice of
ownership of one or more companies.
- "shares" has a more specific meaning: It often refers to the ownership of a
particular company.
1. Contributed Capital or Paid-in capital
- The capital the stockholders paid into the company.
- (Ito mismo yung na-contribute ng shareholder)
- Portion of the paid-in capital representing the total par or stated value of the shares
issued. (NOTE! Share capital represents the shared issued)
- Includes par value of shares and additional amount in excess of par value.
- Share capital
- the money a company raises by issuing common or preferred stock. The amount
of share capital or equity financing a company has can change over time with
additional public offerings.
- Can be acquired through cash or service.
-
- Note:
- A share certificate is a written document signed on behalf of a corporation that serves
as legal proof of ownership of the number of shares indicated. A share certificate is
also referred to as a stock certificate.
- indicate that they have ownership in the company based on the portion amount of shares that
they owned.
- You have voting rights kasi ikaw ang totoong may-ari ng corporation.
- Pero mas maraming bumibili over preference because preference has fixed returns.
Kahit nag-earn ng malaki yung company, wala silang increase in return compared to ordinary
share.
2. Preference share capital
- cannot be issued without ordinary share capital.
- priority over the ordinary shareholders.
- Preference shares represent an ownership stake in a company, and sometimes it called
preferred stock. Preference shares can have both equity and debt characteristics, which favoured
by investors who have different priorities and interests to safeguards. Preference Shares have a
priority claim over the company’s assets and earnings. The shares are more senior than common
stock but more junior relative to bonds in terms of claim on assets.
- are shares of a company’s stock with dividends that are paid out to
shareholders before common stock dividends are issued.
- naunang binabayaran ng dividends over the ordinary.
- they are still part of the corporation, pero they functions more on being an investor.
- walang voting rights
- fixed return computed in the dividend rate.
- Limited lang narereceive nila kahit sila ang inuuna.
“Share capital and subscribed share capital is different.
Components:
1. Share Capital
2. Subscribed share capital
3. Share premium
Nature of subscribed share capital:
- The portion of the authorized share capital that has been subscribed but not yet fully paid.
- Credited for the total par value of the shares subscribed and debited for the total par value
of the fully collected subscriptions.
Difference:
o Share capital ay naka-issue na kay shareholder.
o Subscribed share hindi pa naka-issue. Why? 1. Because it is not yet fully paid. 2.
Share certificate cannot be issued until it is not yet fully paid. As a general rule,
shares are issued only when they are fullypaid.
- These are still unissued share.
Terms to remember:
1. Authorized share
- Authorized shares, (also known as authorized stock or authorized capital
stock), are defined as the maximum number of shares that a company is
legally allowed to issue to investors, as per its own determinations. The
maximum number is established in a company's legal formation
documents, known as the articles of incorporation.
2. outstanding shares
- Shares that are issued or sold to investors from the available number of
authorized shares are known as outstanding shares.
3. Issued shares
Nature of share premium
- The portion of the paid-in capital representing the excess over the par or stated value.
- Additional paid-in capital (APIC)
- A share premium account is typically listed on a company’s balance sheet.
This account is credited for money paid, or promised to be paid, by
a shareholder for a share, but only when the shareholder pays more than
the cost of a share. This account can be used to write off equity-related
expenses, such as underwriting costs, and may also be used to issue
bonus shares.
-
- Sources:
o Excess par or stated value – pag nag-issue ng share at above share capital
o Reissuance of treasury shares at more than cost – pag nagbenta ng share more
than cost
o Donated capital – kapag yung shareholders ayaw na nila ng share. So, binabalik
na nila yung share
o Issuance of share warrants – nag-iissue ng share warrants kapag gusto na yung
mga investors ay magkaroon ng shares natin
o Issuance of convertible bonds payable – asahan na merong equity component
which is called share premium conversion privilege
o Declaration and issuance of small share dividends -
o Quasi-reorganization and recapitalization – restates retained earnings, particularly
equity for a fresh start. Purpose? Para maganda sa mata ng investors. Pag sobrang
laki na ng deficit ng retained earnings ng company, masakit na sa mata ng
investors, meaning, chances are they will not invest in.
Par Value
- A nominal value in dollars that is assigned to each share of stock on the stock certificate.
- When no stated value of par
- The shares or series of shares may or may not have a par value: Provided, That banks, trust,
insurance, and preneed companies, public utilities, building and loan associations, and other
corporations authorized to obtain or access funds from the public whether publicly listed or
not, shall not be permitted to issue no-par value shares of stock.
-
2. Retained Earnings
- All the undistributed net income that a corporation has earned over its life.
- Each time net income is earned, the company can choose to pay that out as dividend or
retain it.
- They also have the option to retain some of the portion of net income as dividend and
retain it.
- Accumulation of income is retained earnings.
- An equity account, having a normal balance on credit side.
What does company do with retained earnings?
- Reinvest in the organization’s core business
- Pay off creditors
- Pay dividends later on (for preference stockholders in arrears)
Net income increases retained earnings, and net loss decreases it.