What is the Difference Between Common Stock and Retained Earnings?

Common stock and retained earnings are two different components of a company's financial structure. Here are the key differences between them:

1. Definition: Common stock represents the shares that indicate ownership in a company, while retained earnings are the accumulated profits that a company has reinvested in itself over time.
2. Stockholder Equity: Both common stock and retained earnings appear in the stockholders' equity section of a balance sheet and on the separate statement of stockholders' equity.
3. Dividends: Common stockholders are entitled to receive dividends out of the company's profits, while retained earnings are the portion of the company's net income that is not paid out as dividends.
4. Associated Cost: The sale of common stock generates capital for the company, but issuing new shares can dilute the ownership of existing shareholders. Retained earnings, on the other hand, are derived from the company's net income and do not involve any dilution of ownership.
5. Financial Statements: Retained earnings are calculated through taking the beginning-period retained earnings, adding the net income (or loss), and subtracting dividend payouts. Common stock is recorded at par value on the balance sheet, regardless of the market value.

In summary, common stock represents the ownership interest in a company, while retained earnings represent the portion of a company's net income that has been reinvested in the business. Both components are recorded under the equity section of the balance sheet and can impact each other when dividends are issued to stockholders.

Comparative Table: Common Stock vs Retained Earnings

Here is a table comparing the differences between common stock and retained earnings:

Common stock represents the ownership of a company by equity shareholders and is used to raise funds for business operations. On the other hand, retained earnings are a portion of the company's net income that is left after paying out dividends to shareholders. They are considered a significant asset by many companies since they assist in making reinvestments in the main business activity.