Intermediate Accounting, Tenth Canadian Edition, Volume 2

Chapter 15

Shareholders' Equity

OVERVIEW

Owners' equity of a corporation is called shareholders' equity because a corporation's owners hold shares as evidence of their ownership claims. Shareholders' equity typically consists of two major categories of corporate capital: contributed capital (share capital and contributed surplus) and earned capital (retained earnings and, under IFRS, accumulated other comprehensive income).

“Earnings” refers to net income for a period, whereas “retained earnings” refers to accumulated earnings retained for use in the business since inception of the corporation. Specifically, retained earnings is the total of all amounts reported as net income, less the total of all amounts reported as net loss and dividends declared, plus or minus the effects of any prior period adjustments (error corrections) through retained earnings, adjustments due to financial reorganization, and treasury share transactions, since inception of the corporation. A dividend distribution may represent a distribution of income (return on capital) or a return of invested capital. A corporation may distribute dividends to its owners in the form of cash, non-cash assets, or additional shares. A dividend paid in the form of additional shares of the corporation results in capitalization of retained earnings or reclassification of earned capital to contributed capital (reclassification of retained earnings to share capital).

This chapter also discusses accounting for transactions ...