Equity

Shareholders' equity is the residual claim on assets after all liabilities are paid — what actually belongs to the owners.

Rearranging the accounting equation makes this concrete: $Equity = Assets - Liabilities$ . If a company has $10B in assets and $7B in liabilities, shareholders' equity is $3B.

Common Stock and APIC

When a company issues shares, the proceeds are split into two line items:

Common Stock (Par Value) — A nominal, legally assigned value per share (typically $0.01 or $0.001). Economically meaningless — a legal relic — but it shows up on every balance sheet.
Additional Paid-In Capital (APIC) — Everything investors paid above par value. Issue shares at $25 with a $0.01 par: $0.01 goes to common stock, $24.99 to APIC.

Together, common stock and APIC reflect total capital raised from issuing equity. These balances only change when shares are issued or bought back — unaffected by daily operations or secondary market price movements.

Retained Earnings

Retained earnings is cumulative net income over a company's life, minus all dividends paid out. It is the single most important link between the IS and the BS.

Key Formula

$Ending RE = Beginning RE + Net Income - Dividends$

Each period, net income flows from the IS into retained earnings on the BS. Dividends reduce it. Over time, retained earnings is the primary driver of equity growth for a profitable company that doesn't issue new shares.

Interview Insight

"How does net income connect to the BS?" Net income flows into retained earnings in the equity section. Profit increases equity dollar-for-dollar (less dividends). This is the direct IS-to-BS link.

A company can have negative retained earnings (an accumulated deficit) if cumulative losses and dividends exceed cumulative profits. This doesn't mean insolvency — just that it has historically paid out or lost more than it earned.

Treasury Stock

Treasury stock represents shares the company has repurchased from the open market. No longer outstanding — no dividends, no voting rights.

Treasury stock is a contra-equity account: it reduces total equity. Buy back $500M of stock, equity drops $500M. This is why buybacks are described as "returning capital to shareholders" — they shrink the equity base, boosting EPS.

Accumulated Other Comprehensive Income (AOCI)

AOCI captures gains and losses that bypass the income statement under accounting rules. Common items include:

Unrealized gains/losses on certain investments
Foreign currency translation adjustments
Pension plan adjustments

AOCI is typically small and rarely drives interview questions, but know it exists — it reflects items not yet realized through the IS.

Putting It Together

Component	What It Represents	Direction
Common Stock + APIC	Capital raised from issuing shares	Increases equity
Retained Earnings	Cumulative profits minus dividends	Increases (or decreases) equity
Treasury Stock	Shares bought back	Decreases equity
AOCI	Unrealized gains/losses bypassing the IS	Increases or decreases equity

Key Takeaways

Equity is the residual: Assets minus Liabilities. It's what belongs to shareholders after all obligations are settled.
$RE = Prior RE + Net Income - Dividends$ — this is the bridge that connects the income statement to the balance sheet every period.
Par value is economically meaningless; APIC captures the real capital raised from share issuances.
Treasury stock is a contra-equity account — buybacks reduce total equity.
The net income-to-retained-earnings link is one of the most commonly tested connections in banking interviews.

Liabilities Summary