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PUTIKA NURALIDA HERDIN | 13/344099/HK/19388

CHAPTER III
A. SUB CATEGORIES OF SHAREHOLDERS EQUITY
In dividing equity into the various categories, the accountant is
maintaining a record of the sources of shareholders equity, to distinguish
between (i) portion of shareholders equity that is contributed to the
corporation when the corporation raises funds through the sale of its shares
and (ii) portion of shareholders equity that arises from the corporations
earnings.
The categories of equity are as follows:
1. Paid in Capital
Source: contribution of assets of any kind, can be in the form of
cash, merchandise, land, buildings, equipment, patents,
copyrights, secret processes, trademarks, goodwill, shares of
other corporations, other items. The contributions purchases
made by investors who receive ownership interests and
becoming shareholders.
2. Earned Surplus (Retained Earnings)
Source: the earnings of the corporation, including not only
earnings

or

profits

from

regular

operations

but

also

extraordinary transactions. It represents the ownership interest


that arises from profits and gains of corporation or the
undistributed return on the shareholders investment. To
determine shareholders equity, one would subtract the deficit
from paid-in capital.
B. FURTHER DIVISIONS OF EQUITY
1. When Par is Stated
Paid-in capital itself is further divided into various sub-categories.
It refers to an arbitrary monetary figure called par value, which
represents the minimum amount that must be received by the
corporation for each share of stock upon original issuance of the
stock for the shares to be considered fully paid. However, there are
no legal limits on the maximum amount at which a share may be
issued or sold by a corporation.

PUTIKA NURALIDA HERDIN | 13/344099/HK/19388


2. When Par is Not Stated
Most jurisdictions still permit stock to be authorized without a par
value, which can be usually be issued and sold without any
restrictions as to price. Statutes generally require directors to
assign to such no-par stock a stated value. If an assignment of
stated value isnt made by the directors for an issuance of no par
stock, then the entire consideration of paid in constitutes stated
capital.
C. BALANCE SHEET REPRESENTATION OF SHAREHOLDERS
EQUITY
The first item to appear in the shareholders equity section of a balance
sheet is a listing of the capital stock of the corporation, where it should be
found: (i) the number of shares authorized, (ii) the number of shares issued,
(iii) whether the stock carries a par value, and if so, the amount of par; (iv) if
the stock is no-par, whether there is a stated value and, if so, the amount of
such value.
Other than that, capital surplus, retained earnings or earned surplus
must be listed. Portions of retained earnings may be reserved or
restricted. This means that a limitation has been placed on that portion of
retained earnings and that the total amount of retained earnings is no longer
available for distribution. Limitations can be placed on retained earnings for
a number of different reasons:
1. Legal Restrictions
2. Contractual Restrictions
3. Financial Planning
4. Protection in Event of Losses
The accountant may reflect them in a note to the balance sheet or as a
formal appropriation of retained earnings.