Wiley GAAP 2008

Perspective and Issues

CON 6 defines stockholders' equity as the residual interest in the assets of an entity after deducting its liabilities. Stockholders' equity is comprised of all capital contributed to the entity plus its accumulated earnings less any distributions that have been made. There are three major categories within the equity section: paid‐in capital, retained earnings, and other comprehensive income. Paid‐in capital represents equity contributed by owners. Retained earnings represents the sum of all earnings less that not retained in the business (i.e., what has been paid out as dividends). Other comprehensive income represents changes in net assets, other than by means of transactions with owners, which have not been reported in earnings under applicable GAAP rules (e.g., accumulated translation gains or losses). Accounting for paid‐in capital and retained earnings are addressed in this chapter; comprehensive income was discussed in Chapter 3 and is not discussed here.

It is generally quite clear that liabilities differ from equity interests, since liabilities are claims against the assets of the reporting entity, while equity represents only residual claims to net assets, after all liabilities have been fully satisfied. While this conceptual distinction is straightforward enough, the evolution of complex financial instruments, some of which exhibit attributes of both liabilities and equity, has made it necessary that a formalized approach to distinguishing between ...