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No headersAny change in the Common Stock, Retained Earnings, or Cash Dividends accounts affects total stockholders’ equity.
Common Stock + Retained Earnings = Total Stockholders’ Equity
Stockholders’ equity increases due to additional stock investments or additional net income. It decreases due to a net loss or dividend payouts. Retained earnings increases when revenue accounts are closed out into it and decreases when expense accounts and cash dividends are closed out into it.
The following examples illustrate journal entries that can cause stockholders’ equity to change.
- Stockholders’ equity before a business opens:DateAccountDebitCredit
Common Stock + Retained Earnings = Total Stockholders’ Equity
0 +0 =0
- Stockholders’ equity after 30 stockholders invest $1,000 each, for a total of $30,000:DateAccountDebitCredit6/1Cash30,000Common Stock30,000
Common Stock + Retained Earnings = Total Stockholders’ Equity
30,000 + 0 = 30,000
Each investor is now worth $1,000 in the business.
- Stockholders’ equity after one month of operations in which Fees Earned is $65,000 and total expenses are $5,000 (so net income is $60,000):DateAccountDebitCredit6/30Fees Earned65,000Retained Earnings65,0006/30Retained Earnings5,000ALL Expenses5,000
Common Stock + Retained Earnings = Total Stockholders’ Equity
30,000 + 60,000 = 90,000
Each investor is now worth $3,000 in the business.(The original $1,000 investment plus 1/30th of the $60,000 profit, or $2,000)
- Stockholders’ equity after one month of operations and after each of the thirty investors receives a cash dividend payment of $500:DateAccountDebitCredit7/10Retained Earnings15,000Cash Dividends15,000
Common Stock + Retained Earnings = Total Stockholders’ Equity
30,000 + 45,000 = 75,000
Each investor is now worth $2,500 in the business.
(The original $1,000 plus $2,000 profit - $500 dividends paid out)
Stockholders’ equity can increase in two ways:
- Owners invest in stock and Common Stock is credited and increases
- Business generates net income and Retained Earnings is credited and increases
Stockholders’ equity can decrease in two ways:
- Dividends are paid out and Retained Earnings is debited and decreases
- Business experiences a loss and Retained Earnings is debited and decreases
The following calculation example shows how stockholders’ equity can change from the beginning to the end of an accounting period.
Beginning stockholders’ equity12,000+ Additional investments in stock6,000+ Net income (or – Net loss)3,000- Dividends- 1,000= Ending stockholders’ equity\(\ \overline{20,000}\)The calculation below is the same as the one above except that net income is instead presented as revenue minus expenses.
Beginning stockholders’ equity12,000+ Additional investments in stock6,000+ Revenue5,000- Expenses-2,000- Dividends- 1,000= Ending stockholders’ equity\(\ \overline{20,000}\)If net income is not given, you can solve for it algebraically using the calculations above. Assume net income is x in the first calculation above:
Beginning stockholders’ equity12,000+ Additional investments in stock6,000+ Net income (or – Net loss)x- Dividends- 1,000= Ending stockholders’ equity\(\ \overline{20,000}\)Beginning stockholders’ equity + Additional investments in stock + Net income - Dividends = Ending stockholders’ equity
12,000 + 6,000 + x – 1,000 = 20,000
x = 20,000 – 12,000 – 6,000 + 1,000
x = 3,000
The highlighted accounts are the new accounts you have learned.
LEARNING BY DOING
I learned how to drive a standard transmission car – using a stick shift – in San Francisco. My husband is an expert at this and was in the passenger seat as my instructor. In spite of the fact that he knew how to shift and clutch, and that he was telling me (rather loudly) what to do, I still rolled backward down a hill and over a motorcycle. I can drive a stick shift perfectly fine now, but it took lots of practice and stalling to get the feel of the process.
Accounting is a skills discipline; it is also something you learn by doing. Your instructor may be an expert who explains and demonstrates, but you will only truly understand the process with hands-on practice. You have to learn it by doing it to get the feel of the process. That is how you will become an expert yourself.
Topics – The basic accounting cycleFactJournal EntryCalculate AmountFormatBusiness terminologyxNet incomexTypes of accountsxRevenue accountsxExpense accountsxIncome statementxxJournalxJournalize revenue transactions for cashxJournalize expense transactions for cashxPost journal entries to the ledgersxIncome statementxxJournalize closing entriesxPost closing entries to ledgersxJournalize and post revenue transactions on accountxxJournalize expense and post transactions on accountxxAsset accountsxLiability accountsxJournalize purchase of an asset for cashxJournalize purchase of an asset for a down payment and loanxStockholders’ equity accountsxJournal entry for owner investmentxJournal entry for dividendsxTotal stockholders’ equityxAccounting equationxxChanges in stockholders’ equityxRetained earnings statementxxBalance sheetxxFinancial statements connectedxxAccounting cyclex1.9: Changes in Stockholders' Equity is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.