1. Shareholder's Equity

Let's talk about shareholders' equity for a little bit. Shareholders' equity is, hopefully you'll remember, a part of the accounting equation. Assets equals liabilities plus shareholders' equity or owner's equity. You'll remember, hopefully, that shareholders' equity itself is made up of two separate things. The first is retained earnings, and the second is contributed capital. Contributed capital is what we're gonna spend most of this chapter talking about. We're gonna talk a whole lot about stock. Before we do, let's do a quick recap on retained earnings. Retained earnings is beginning retained earnings plus net income minus any dividends, and that gives you your ending retained earnings. And of course, you'll remember that net income is revenues minus expenses.

You can see how this all works back into shareholders' equity in the end. Just like retained earnings has its own little formula, contributed capital is no different. For contributed capital, we have two different buckets that it falls into. The first is stock at par, and the second is stock over par.

And when you add those together, you get your contributed capital. Now, that's not what these accounts are called. These aren't called stock at par and stock over par. Let's take a look at a single share of stock. If I tell you that the par value of a share of stock is $10, that doesn't mean anything to you right now. And don't worry, it shouldn't. But let me just illustrate it like this. For accounting purposes, we split up a share of stock into par value and then anything above par value. So if you sell a share of stock that is par value of 10, let's say you sell it for 50.

Well, you put $10 into the par account, and you put $40 into the over par account. What if you sold one for 75? Okay, well, that's good. That's more than 50. Doesn't matter. You still put 10 into the par account, and then you put the difference, the 65, into the over par account. This over par account, I keep saying it's over par because it's anything above this $10 par line. This is actually called additional paid-in capital, and you'll see it abbreviated as APIC. APIC is the account that holds anything above the par value.

So instead of calling this stock over par, let's call this APIC. Now, this stock at par, that's not really the right name for that either. It's descriptive because it's describing the account that holds the amount of money to cover par value, but it's not super descriptive because it just says stock. And we could have two kinds of stock. We could have common stock, which you'll see as CS, or preferred stock, which you'll see as PS. I'm not gonna go too far into it right now, but common stock has fewer rights than preferred stock. Obviously, preferred stock is better because it's preferred versus common. So if I just say stock at par, that's not super helpful.

So instead of saying stock at par, what we do is we call it common stock or preferred stock. So those accounts you'll see are preferred stock, and you'll see some number of shares at some par value. Then you'll see common stock, and you'll see number of shares at some par value. Now, since we're separating common and preferred stock par values, it stands to reason we should probably separate common and preferred stock APIC as well. So you do. You have APIC preferred stock and APIC common stock. And that's the basics of what your stockholders' equity section of the balance sheet is gonna look like. You could have one other APIC account called treasury stock, APIC treasury stock, and we'll go over treasury stock in a little bit.

So as a recap, you have preferred and common stock. Those are the two different types of stock that you could have as a company. For each of those, you have a par value, and when you sell a share of stock, you put the par value into these accounts. Should you sell a share of stock for more than the par value, you put it into its respective APIC account because this account is the one that holds anything above the par value. All of that together adds up to your contributed capital, which is a part of shareholders' equity.