Theory that common stockholders are considered to be the real owners of the business. The residual equity theory is in part the basis for the earnings per share (eps) computation that applies only to common stockholders. The purpose of this approach is to furnish better information for common stockholders in making investment decisions and in predicting possible future dividends.
The theory lies between the proprietary theory and the entity theory. Under it, the accounting equation is: Assets - Liabilities - Preferred Stock = Common Stock

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Dictionary of Accounting Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.

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