Stockholders’ equity — the owners’ chair

Equity is the residual claim on a business after every creditor has been paid. It’s what would be left for the owners if the company sold every asset and settled every debt. For a sole proprietor it’s one number — Capital. For a company, equity gets sliced into several components, each telling a different story about how the business was financed and what’s been retained.

The four components

1. Share capital — face value of shares issued. If a company issues 1 lakh shares at ₹10 face value, share capital = ₹10 lakh, regardless of what investors paid.
2. Share premium (Additional Paid-in Capital / APIC) — what investors paid above face value. If those 1 lakh shares were issued at ₹50, share premium = (₹50 − ₹10) × 1 lakh = ₹40 lakh.
3. Retained earnings — cumulative net income that wasn’t paid out as dividends. Grows with profits; shrinks with losses and dividend distributions.
4. Treasury stock — own shares bought back. Reduces equity, never increases it.

Issuing shares — the journal entry

Company issues 1 lakh equity shares of ₹10 face value at ₹50 per share. Investors pay ₹50 lakh:

Dr. Cash / Bank                       50,00,000
        Cr. Share Capital (face value)         10,00,000
        Cr. Securities Premium                 40,00,000

Note that both share capital and premium are paid by the same investor in the same transaction. The split is purely accounting — face value goes to one account, the rest to the premium.

Common vs. preferred shares

Common (equity) shares — vote at general meetings, receive dividends only after preferred, share in residual value on winding up.

Preferred shares — fixed dividend rate (like a bond coupon), paid before common, but no voting rights and capped upside. Variants:

• Cumulative — missed dividends accumulate and must be paid before common gets anything.
• Participating — share in extra dividends beyond the fixed rate.
• Convertible — can be converted to common shares at a defined ratio.
• Redeemable — company can buy back at a defined price after a defined date.

Indian companies often issue Optionally Convertible Preference Shares (OCPS) or Compulsorily Convertible Preference Shares (CCPS) in fundraising rounds.

Dividends — three dates

• Declaration date — board declares the dividend. Liability arises.
  Dr. Retained Earnings · Cr. Dividends Payable
• Record date — shareholders on the books on this date are entitled.
• Payment date — cash actually goes out.
  Dr. Dividends Payable · Cr. Cash

Until FY 2019-20, Indian companies paid Dividend Distribution Tax (DDT) at the company level when dividends were declared. The DDT regime was ABOLISHED by the Finance Act 2020 effective 1 April 2020; dividends are now taxed in the hands of the shareholder at slab rate under Section 56, with the company deducting TDS at 10% if annual dividend exceeds ₹5,000 per shareholder per company. Books no longer record DDT for any post-FY20 distributions in the shareholder’s hands as of FY 2020-21.

Share buybacks (treasury stock)

Company buys back its own shares from the market. Reduces shares outstanding, increases EPS, signals undervaluation. Accounting entry uses the cost method:

Dr. Treasury Stock                    20,00,000
        Cr. Cash                                20,00,000

Treasury stock is a CONTRA equity account — appears in equity with a debit balance, reducing total equity. It’s not an asset; you can’t own yourself.

Bonus issues and rights issues

• Bonus issue — free additional shares issued from accumulated reserves. Doesn’t change total equity, just slices the pie into more pieces. Common in India to make shares more affordable.
  Dr. Retained Earnings · Cr. Share Capital
• Rights issue — existing shareholders get a pre-emptive right to buy new shares at a discounted price, in proportion to their holdings. Raises new capital while protecting existing shareholders from dilution.
• Stock split — face value reduced, number of shares increased. ₹10 face value → ₹2 face × 5 shares. Pure cosmetic; no balance-sheet impact at the line-item level.

Lesson recap

• Equity has four pieces: share capital, premium, retained earnings, treasury stock.
• Issuance splits cash received between face value (share capital) and excess (premium).
• Preferred shares sit between debt and common equity in payment order.
• Dividends move through three dates: declaration, record, payment.
• Buybacks create treasury stock — a contra-equity item.