Summary of Shareholders' Equity and Retained Earnings Concepts

Shareholders' Equity

• Refers to owners’ investments in the business and earnings.

• Composed of:

  • Contributed Capital: Cash or assets from issued shares.

  • Retained Earnings: Cumulative earnings minus dividends declared.

Retained Earnings

• Not classified as assets; part of shareholders' equity.

• Affected by:

  • Dividends: Decrease retained earnings.

  • Revenues: Increase retained earnings (income from sales).

  • Expenses: Decrease retained earnings (costs incurred for revenues).

Revenue and Expenses

• Revenue: Earnings from goods/services.

• Expense: Costs related to earning revenues; recognized when incurred (e.g., utilities, salaries).

• Net Income (Loss): Difference between revenues and expenses.

  • Net income increases retained earnings; net loss decreases retained earnings.

Shareholders' Equity Changes

• Increases: New share issuance, revenue growth.

• Decreases: Dividend payouts, increased expenses.

Financial Statements

• Balance Sheet: Reports shareholders’ equity (share equity + retained earnings).

• Statement of Retained Earnings: Computes retained earnings, adjusting for net income/loss and dividends.