expenses, another part to profits (if any), and last leave (among the de-
ferred credits) only that proportion which represents the uncompleted part
of the contract.
Capital Section of the Balance Sheet
The items classified here go to make up the shareholders’ equity, net worth,
capital, or ownership section of the balance sheet.^1 Those terms and other
variants are used interchangeably; they mean approximately the same thing,
and students should learn to identify these terms so that they will not be con-
fused if one or the other is used. This section of the balance sheet contains
the items making up the ownership claims against the business. A stock-
holder who owns 100 shares of Johnson & Johnson common stock is a part
owner of the corporation. Given that Johnson & Johnson has approxi-
mately 2,968 million shares outstanding in February 2005, the owner of 100
shares probably feels that his or her vote at proxy time carries little weight in
financial decision making. Every vote counts, though. It represents the origi-
nal investments of the owners plus any earnings they have retained in the
business, or less any accumulated losses the business may have suffered.
The amount shown as preferred stock represents the par or stated
value of the various types of preferred stock issued, sold, and outstanding.
The class of preferred stock is usually identified by its stated yearly divi-
dends. Creditors often classify or consider the preferred issues simply as
another form of equity, yet these shares have a prior claim on dividends
and usually in case of dissolution have a claim prior to the common stock-
holders on the assets. They therefore, from the viewpoint of the common
shareholders, take on some of the aspects of a creditor claim.
The common stock account shows the par value or stated value of the
common stock issued, sold, or outstanding. It is often said that this ac-
count represents the amount that the stockholders originally put into the
business, but this is not likely to be literally true and should be modified by
our historical knowledge of the firms’ financial affairs. In one sense the
capital stock account may represent more than the original investment,
since common stock may have been issued and sold periodically in the pri-
mary market as the firm raised funds to expand and to improve its equity
base. In another sense the capital stock account may represent less than the
original investment, for if in time the value of the firm’s stock went over
par, or over its stated value, and new issues were sold at a higher price, the
difference is classified as capital or paid-in surplus. However, the new pur-
chasing stockholders, at least, might well consider this amount part of their
original investment. Lastly, the capital stock account is increased if the firm
issues stock dividends. These have the accounting effect of reducing the