STOCKHOLDER’S EQUITY

Chelsea Kasim (2113030)

Email: [email protected]

Arline Cornelia L. David L. (2113045)

Email: [email protected]

ATMA JAYA MAKASSAR UNIVERSITY

Abstract

This paper contains a brief discussion of shareholders' equity in the company.

Equity is the owner's right to the company's assets after all obligations are paid.
The equity of a company can be calculated by subtracting the company's liabilities
from the company's total assets. In other words, the company owner or shareholder
owns the remaining assets after all liabilities are paid. Therefore, Equity is also
often referred to as Net Assets or assets reduced by liabilities. The equity of a
company can come from the addition of capital from the owner (investment from
the owner) or profits from its business activities. Shareholder equity is the
company's debt to shareholders. Therefore, shareholders' equity can also be seen
as a picture of a legal relationship between the company and shareholders. Thus
from these problems how to report information and present information of this
element so that relationships and juridical responsibilities can be maintained.

Keyword: Equity, Shareholders, liabilities and company.

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1. Introduction
Equity is a part of the owner's rights in a company, which is the difference
between existing assets and liabilities and also does not includes a measure of
the sale value of a company. Equity must also be reported in such a way so that
it can provide clear information about the source and is also presented in
accordance with laws and regulations and also the deed of establishment. must
also be in accordance with applicable laws and regulations and also the deed
of establishment. This equity in individual companies is usually called capital,
for non-profit organizations this equity is usually referred to as net assets to
avoid the impression of ownership. The concept of a business entity that
separates ownership and management, information in shareholders' equity is
very important because it shows the relationship between the company and its
shareholders. It shows the relationship between the company and its
shareholders. Equity Shareholders' equity is the right to the wealth or value
embedded in the company.
From another point of view of the entity namely the business, shareholder
equity is corporate debt to shareholders. Therefore, shareholders are
shareholders can also be seen as an illustration of the juridical relationship
between the shareholder and the holder share. Thus from the problem how to
report information and present it information on this element so that juridical
relations and responsibilities can be maintained. Reporting of this information
aims to be able to provide information to parties who interested in management
efficiency and stewardship. This report also provides information about the
owner's history and investment other equity holders who are the responsibility
of the juridical. In order for that purpose relating to the equity of shareholders
is a source of equity, settlement of dividend distribution and liquidation.

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2. Literatur View
2.1 Corporate Form
Specific characteristics of the corporate form that affect accounting include:
1. Influence of state corporate law
Anyone wishing to establish a corporation must submit articles of
incorporation to the state. After meeting the requirements, the state issues a
corporate charter, thereby recognizing the company as a legal entity subject
to state law.
2. Use of the capital stock or share system.
Shareholders' equity in a corporation generally consists of a large number
of units or shares. Each share has the following rights:
a. Share profits and losses proportionally.
b. To share proportionately in management (right to elect directors).
c. To share proportionately in the assets of the company upon liquidation.
d. To share proportionately in the issue of new shares of the same class
referred to as preemptive right.
3. Development of a variety of ownership interests.
In every company, one class of stock should represent the basic
ownership interest. That class is called common stock. Common stock is the
remaining interest of the company that bears the highest risk of loss and
receives the benefits of success. In an effort to broaden investor appeal,
companies may offer two or more classes of stock, each with different rights
or privileges usually called preferred stock..
2.2 Components of Stockholders’ Equity

Owners' equity in a corporation is defined as shareholders' equity,

stockholders' equity, or corporate capital. The following four categories usually
appear as part of shareholders' equity: capital stock or capital, additional paid-
in capital, retained earnings, and accumulated other comprehensive income.
Share capital and additional paid-in capital, are contributed (paid-up) capital.
Contributed (paid-in) capital is the total amount paid on share capital-the
amount provided by shareholders to the corporation for use in the business.

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 Earned capital is capital that develops from profitable operations. It consists
of all undistributed earnings that remain invested in the company. Retained
earnings represent the company's earned capital. Accumulated other
comprehensive income reflects the aggregate amount of the items of other
comprehensive income.

2.3 Issuance of Stock

In issuing shares, companies follow this procedure. First, the state must
authorize the shares. Next, the corporation offers the shares for sale, entering
into a contract to sell the shares. Then, after receiving the number of shares, the
corporation issues the shares. The accounting issues involved in issuing shares
are as follows.

1. Accounting for par value stock

The nominal value of a share bears no relationship to its fair value.

Currently, the par value associated with most share capital issues is very
low. The low par value helps companies avoid contingent liabilities
associated with shares sold below par. To show the information required for
the issuance of shares at par value, companies maintain accounts for each
class of shares as follows:

 Preferred Stock or Common Stock: these two share accounts reflect the
par value of the shares issued by the company.
 Paid-up Capital in Excess of Par: paid-in capital over par shows the
excess of par value paid by shareholders in return for the shares issued to
them.

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2. Accounting for no-par stock
Many countries allow the issuance of share capital without a par value,
called no-par shares. The reasons for issuing no par value shares are twofold.
First, the issuance of no-par shares avoids contingent liabilities that may
occur if a company issues shares at par value at a discount. Second, some
confusion arises over the relationship (or rather the absence of relationship)
between par value and fair value. If the shares have no par value, the
questionable treatment of using par value as the basis for fair value never
arises.
This is particularly advantageous whenever issuing shares for property
items such as intangible or tangible fixed assets. The main disadvantage of
no-par value shares is that some states levy high taxes on these issues. In
addition, in some states, the total issue price of no-par value shares may be
considered as legal capital, which may reduce flexibility in paying
dividends.
3. Accounting for stock issued in combination with other securities (lump-sum
sales)
Generally, companies sell classes of shares separately from each other.
The reason for doing so is to track results relative to each class, as well as
relative to each lot. Sometimes, a company issues two or more classes of
securities for a single payment or all at once (for example, in the acquisition
of another company). The accounting issue in such a lump sum sale is how
to allocate the proceeds among the multiple classes of securities. Companies
use one of two allocation methods:
a. Proportional Method
If fair value or another sound basis for determining relative value is
available for each class of securities, the company allocates the lump sum
received among the classes of securities proportionately.

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 b. Incremental Method
In cases where the company cannot determine the fair value of all classes
of securities, it can use the incremental method. It uses the fair value of
the security as the basis for the classes for which it knows, and allocates
the remaining lump sum to the classes for which the fair value is
unknown.
4. Accounting for stock issued in noncash transactions
Accounting for the issuance of shares for property or services involves
valuation issues. The general rule is: Companies should record shares issued
for services or property other than cash at the fair value of the shares issued
or the fair value of the non-cash consideration received, whichever can be
more clearly determined. If a company can easily determine both, and the
transaction results from a fair exchange, there may be little difference in the
fair value. If a company cannot easily determine the fair value of the shares
it issues or the property or services it receives, it should use appropriate
valuation techniques.
5. Accounting for costs of issuing stock
When a company issues common stock, it must report the direct costs
incurred to sell the stock, such as underwriting fees, accounting and legal
fees, printing costs, and taxes, as a reduction of the amount paid. For
example, Walgreens debits issuance costs to Paid-in Capital in Excess of
Par - Common Stock because they are not related to the company's
operations. As a result, issuance costs are financing costs. As such, the cost
of issuance should reduce the proceeds received from the sale of the shares.
2.4 Preferred Stock
Preferred stock is a special class of stock that has certain preferences or
features that common stock does not have. The following features are the
features most commonly associated with preferred stock issues.
 Preference as to dividends or Preference as to dividends.
 Preference as to assets in the event of liquidation or Preference as to assets
in the event of liquidation.

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  Convertible into common stock.
 Callable at the option of the corporation.
 Nonvoting.

The corporation may attach any preferences or restrictions, in any

combination it wishes, to the preferred stock issue, as long as it does not
specifically violate its State's incorporation laws. Also, it may issue more than
one class of preferred stock. Some of the most common features associated
with preferred stock follow.

 Cumulative Preferred Stock: Cumulative preferred stock requires that if a

company fails to pay dividends in any year, it must make up for it in the
following year before paying any dividends to common stockholders.
 Participating Preferred Stock: Holders of participating preferred stock share
equally with common stockholders in any profit distributions beyond a
specified rate.
 Convertible Preferred Stock: Convertible preferred stock allows
shareholders, at their option, to exchange the preferred stock for common
stock at a predetermined ratio.
 Callable Preferred Stock: Callable preferred stock allows the corporation at
its option to call or redeem the outstanding preferred stock on a specified
date in the future and at a specified price.
 Redeemable Preferred Stock: Recently, more and more preferred stock
issues have features that make the securities more like debt (a legal
obligation to pay) than equity instruments.
2.5 Reacquisition of Shares
Companies often buy back their own shares. In fact, share buybacks now
exceed dividends a form of distribution to shareholders. Corporations purchase
their outstanding shares for several reasons:
 To provide a tax-efficient distribution of excess cash to shareholders.
 To increase earnings per share and return on equity.

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  To provide stock for employee stock compensation contracts or to fulfill
potential merger needs.
 To thwart takeover attempts or reduce the number of shareholders.
 To make a market in the stock.

After reacquiring shares, a company may retire them or hold them in

treasury for reissue. If not retired, the shares are referred to as treasury shares.
Technically, treasury stock is the company's own stock, reacquired after being
issued and paid in full. Treasury stock is not an asset. Treasury stock is
essentially the same as unissued capital stock. Companies use two general
methods to deal with treasury stock:

a. The cost method: results in debiting the Treasury Stock account for the
reacquisition cost and reporting this account as a deduction from total paid-
in capital and retained earnings in the balance sheet.
b. Par (stated) value method: records all treasury stock transactions at par value
and reports treasury stock as a deduction from share capital only.
3. Conclusion
Equity is a part of the owner's rights in a company, which is the difference
between assets and liabilities and does not include a measure of the sale value
of the company. between existing assets and liabilities and also does not
include a measure of the sale value of a company. A company is a legal entity
that can own property, sign agreements, enter into debts and receivables, and
have rights and obligations like private persons. The company has two types of
open and closed companies. In establishing a company, it must have capital
and shares, in order to obtain mutual benefits among shareholders. Owner's
capital in the company called shareholders' capital (stockholder's equity).
Shares are a sign of participation a person or company in participating in having
power over a limited liability company.

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 Large companies require a very large amount of money to carry out their
operations. They cannot expect to finance all their operations from borrowings.
They need capital which will be raised by issuing shares. The shares issued by
the company will have a nominal value listed on the shares of stock that will
be placed or sold to prospective shareholders.
4. Suggestion
The most basic thing to learn in stakeholder's equity is the difference
between common stock, preferred stock, and treasury stock. This can affect
investment decision making whether to choose common stock or preferred
stock. This will also affect the preparation of the company's financial
statements.

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 BIBLIOGRAPHY
Kieso, D., Weygandt, J., & Warfield, T. (n.d.). Intermediate Accounting (17 ed.).
Wiley. Retrieved July 2023

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