Shareholders' equity represents the interest of a company's shareholders in the net assets of the company. According to the accounting equation:
|Shareholders' equity = Assets − Liabilities|
On a balance sheet, there is separate section for shareholders' equity which includes its components such as common stock, preferred stock, additional paid-up capital, accumulated other comprehensive income, treasury stock and retained earnings.
Common stock represents the legal capital of the company.
Preferred stock is a sort of share capital which has a preferred right to dividends.
Additional paid-up capital represents the cash contributed by the shareholders of the company in excess of the legal capital of the company i.e. the common stock.
Accumulated other comprehensive income represents the credits or debits in shareholders' equity which are other than those related to transactions with shareholders, for example credit for revaluation surplus, credits and debits related to translation reserve, changes in fair value of available for sale investments, etc.
Treasury stock is contra-equity account which means that it appears as a deduction from other shareholders' equity accounts and it represents the cost of the company's investment in its own share stock.
Retained earnings represent the total earnings of the company retained by the company for reinvestment. It equals the retained earnings of last period plus net income for the period minus dividends paid during the period.
Written by Obaidullah Jan, ACA, CFA