The stockholders' equity section of the balance sheet reports equity and associated paid-in capital. Also included are summarized retained earnings. Changes in retained earnings may also be reported in separate statements.
With new terminology and new accounts comes a deeper dive into the stockholders' equity section of the balance sheet. Including a corporation's preferred stock, common stock, additional paid‐in capital, treasury stock, and retained earnings, the stockholders' equity section can be reported in one of two ways:
- Method 1—Each class of stock is reported separately, followed by its associated paid-in capital account.
- Method 2—Each class of stock is reported separately, and then the paid-in capital account is aggregated for all classes of stock.
Any significant changes made to the stockholders' equity section during the period may also be presented in the statement of stockholders' equity or as a note on the financial statements.
Reporting Stockholders' Equity Section
The retained earnings account is summarized in the stockholders' equity section of the balance sheet. However, any changes to retained earnings can be reported by using one of the following statements:
1. Retained earnings statement
2. Combined income and retained earnings statements
3. Statement of stockholders' equityThe retained earnings statement includes a beginning balance for retained earnings followed by the addition of net income or deduction of a net loss and then the deduction of dividends. Once these amounts have been added or subtracted, the ending retained earnings amount for the period is calculated, and that will appear on the balance sheet.
A prior period adjustment is a change or correction of an error made in a prior period that is reflected directly in retained earnings, not on the income statement. Because this error occurred in a prior period, the correction should not affect the current period's income statement. Typically, a prior period adjustment is used for errors resulting from a mathematical mistake or a mistake from applying an accounting principle incorrectly. Preparation of a retained earnings statement is sufficient if the only change in the stockholders' equity section of the balance sheet is because of net income, net loss, or dividends. However, a statement of stockholders' equity is generally prepared when there have been changes to the stock and paid-in capital accounts of a corporation. This statement is traditionally prepared in a columnar format. The columns represent major stockholders' equity classifications. The types of changes to the columns are identified in the left-hand column of the statement.