A shareholder's basis in the stock of the S corporation initially depends on the amount of capital contributed by the shareholder.
Earnings are accumulated in a retained earnings account, but they are not considered earnings and profits (), since the income is taxed on the individual returns of the shareholders.
Unfortunately, most people do not understand this, and the mainstream media is treating “Dow 20,000” as if it is some sort of great historical achievement…
The average began tracking the most powerful corporate stocks in 1896, and has served as a broad measure of the market’s health through 22 presidents, 22 recessions, a Great Depression, at least two crashes and innumerable rallies, corrections, bull and bear markets.
In this balance sheet, the assets are larger than its liabilities, which means that there is a larger buffer of ‘shareholder equity’ (shown on the right).
Shareholder equity is simply the gap between total assets and total liabilities that are owed to non-shareholders. In the situation shown above, the shareholder equity is positive, and the bank is solvent (its assets are greater than its liabilities).
The following example shows how a bank can become insolvent due customers defaulting on their loans.