A major source of assets of an entity is owners' equity. Owner's equity of a corporation is called stockholders' equityor shareholders' equity because the owners of the business hold shares of stock as evidence of their ownership claims. Stockholders' equity typically has two major classifications for reporting purposes: paid-in capital (contributed capital) and retained earnings (earned capital). Paid-in capital includes the subclassifications of capital stock and additional paid-in capital. This chapter discusses the issuance of stock and the reacquisition of shares.
The term earnings refers to net income for a period. The term retained earnings refers to accumulated earnings. That is, retained earnings is the total of all amounts reported as net income since the inception of the corporation less the sum of any amounts reported as net losses and dividends declared since the inception of the corporation. Thus, distributions of corporate profits to stockholders reduce retained earnings. A corporation may distribute cash, noncash assets, or additional shares of the corporation's own stock to its owners in the form of dividends. A distribution of a corporation's own stock results in capitalizing retained earnings. Cash dividends and stock dividends are discussed in this chapter.