All about America

Stockholders’ Equity

The stockholders’ equity section contains the capital contributed by the owners (also called shareholders or stockholders) and the earnings retained by the business (this account is called Retained earnings). On the Balance Sheet, the stockholders’ equity section is divided into Contributed capital (capital put in by the owners) and Retained earnings. The contributed capital section contains an entry for each of the different
types of stock the company has issued. Larger companies often issue two types of stock, common stock and preferred stock. Smaller companies will usually issue only common stock. In addition, there can be different types of common and preferred stock issued, with each type having unique privileges and benefits. Since the overwhelming majority of accountants will see only companies with a single class of common stock, we won’t worry about all of the permutations that can happen.

Types of Stock
The most prevalent type of stock is common stock. Virtually every corporation issues common stock. Another type of stock that is popular, but to a much lesser extent, is preferred stock. There are some major differences between common and preferred stock. Common stock has voting rights, whereas preferred usually does not. Preferred stock has a preference in receiving dividends, which means that holders of common stock cannot be paid dividends unless the holders of preferred stock receive dividends.

The preferred stock often has additional benefits that make it act more like debt financing (such as a bond or a long-term note). There may be a stated percentage dividend rate (like an interest rate), there may be a rule that unpaid preferred stock dividends in any year are carried over and must be paid in the future before any dividends are paid to holders of common stock, and sometimes there is a conversion feature, meaning
that a specified number of shares of preferred stock can be turned into (converted into) a stipulated number of common shares.

Taken From : Accounting Demystified

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