The Components of Stockholders’ Equity

Define and discuss the term “equity”

Equity entails the residual interest in the entity’s assets that remains after the deduction of liabilities (Needles, & Powers, 2011). In the case of a business enterprise, equity is the ownership interest. In the non-profit organizations that do not have the ownership interest, equity is divided into permanently restricted, temporary restricted and unrestricted net assets. The criteria for dividing net assets are based on the presence or absence of donor-imposed restrictions. The stakeholders’ equity changes due to the entity’s operations and circumstances that might affect the entity (Needles, & Powers, 2011). For instance, with the sale of stock to investors, the level of stock will reduce depending on the amount of stock sold. Payment of cash dividends reduces shareholder’s equity.

What financial statement element other than equity is typically affected by owner investments and distributions?

Investment by owner refers to increase in net assets of an organization due to the owner’s investment in organizational funds by providing money. In this scenario, the organizational cash increases along with equity.

Distribution to owners entails the organization distributing its profits to the owners. Precisely, the transactions involve the decrease in net assets due to the transfer of assets, provision of services by the company to owners (Needles, & Powers, 2011). The transactions involved are payment of dividend and issue of shares. The element that is affected is the cash of the organization.



Needles, B. E., & Powers, M. (2011). Principles of financial accounting. Australia: South-Western Cengage Learning.


Do you need an Original High Quality Academic Custom Essay?