Corporations generate the majority of total business dollars in the United States. The corporation, as a form of business ownership, has both advantages and disadvantages. One of the main advantages of a corporation is that owners have protection against liability, because the corporation is a separate entity. With sole proprietorships and partnerships, the individual assets of the owners are at risk, but that is not the case with corporations. The owners of a corporation are stockholders, or shareholders, who have stock in the company and may also receive dividends. The stockholders' equity includes preferred stock, common stock, additional paid‐in capital, retained earnings, and treasury stock and is reported on the corporation's balance sheet.
At A Glance
- A corporation is a separate legal entity that operates independently of its owners.
- As with any other business structure, there are both advantages and disadvantages to operating as a corporation.
Stockholders' equity is the equity section of the balance sheet for a corporation.
- Components that are specific to the stockholders' equity section of the balance sheet include paid-in capital, retained earnings, and dividends. These components are necessary to describe the net worth of an organization.
- The shares of stock of an organization can be characterized as authorized, issued, and/or outstanding.
Classes of stock, such as common stock and preferred stock, affect the rights of the stockholders.
- The journal entries associated with the issuance of stock usually include recording an increase in an asset such as cash, an increase in the specific stock, and if necessary, an entry to the paid-in capital in excess of par account.
- Three dates that are included in a dividend announcement are the date of declaration, the date of record, and the date of payment.
- When a cash dividend is declared, the board of directors has authorized the distribution of cash to the stockholders of the organization.
- When a stock dividend is declared, the board of directors has authorized the distribution of additional shares of stock to the stockholders of the organization.
- The main objective of a stock split is to reduce the market price of each share of stock.
- Corporations sometimes reacquire their own stock to benefit employees and to help support the market price of their stock.
- 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.