Equity

The third section of the balance sheet is the equity section. This section of your balance sheet may look a little different, depending on your form of business ownership.

Let's look at the main components of the equity section for a corporation.

Capital stock

Capital stock exists only in a corporation. It represents the share­holders' ownership of the business. In most countries, the capital stock appears only on the balance sheet at a nominal cost, meaning that the shares are not meant to represent their market value; they're meant only to be place holders so that readers of the financial statements can tell that they exist.

In the corporation's incorporation documents, there will be a statement of the nominal value of each share. For example, if you are the only shareholder and you have subscribed for 100 shares at $.01 per share, the value of the shares on the balance sheet would be 100 X $.01, or $1.00. You would give the company $1 cash, and it would issue 100 shares to you from its treasury.

There may be different classes of capital stock outstanding in your corporation:

Common stock: This kind of stock is usually (but not always) the only voting stock issued, making common stock­holders the true owners of the business. Holders of common stock would get to vote on issues such as the payment of dividends, the appointment of directors, and the signing of significant trade contracts.

Preferred stock: Preferred stock is sometimes called preference or "pref" shares and is a different class of shares from common stock. There may be several series of these shares (Pref A, Pref B, etc.). They are called preferred because, in the event of the liquidation of the corporation, preferred stock holders will receive the value coming to them from the corporation before (or in preference to) the common shareholders. Preferred shares are also frequently used in tax and estate planning for small corporations, subjects that are beyond the scope.