Journal Entry for Issuance of Common Stock

Issued common stock for cash is the process that company sells its ownership to the investor in exchange for cash to support the operation. As you can see from the journal entry above, the total common stock equal to the cash received from investor. The accounting for the issuance of a common stock involves several steps. However, it is crucial to understand that every share has a par value. This par value represents the share’s value in the company’s articles.

  1. Therefore, the amount that a corporation received, both cash or non-cash assets, becomes the legal capital; hence such amount is recorded entirely as common stock.
  2. This includes the issuance at par value, at no par value, at a stated value, and the issuance for non-cash assets.
  3. There are a few things which you should be known related to common share.
  4. The company can make the journal entry for the issuance of common stock for cash at par value by debiting the cash account and crediting the common stock account.

Common stock usually has a par value although the meaning of this number has faded in importance over the decades. Upon issuance, common stock is recorded at par value with any amount received above that figure reported in an account such as capital in excess of par value. If issued for an asset or service instead of cash, the recording is based on the fair value of the shares given up. However, if that value is not available, the fair value of the asset or service is used. Even though the difference—the selling price less the cost—looks like a gain, it is treated as additional capital because gains and losses only result from the disposition of economic resources (assets). Assume that on August 1, La Cantina sells another 100 shares of its treasury stock, but this time the selling price is $28 per share.

Common stock

Shares with a par value of  $5 have traded (sold) in the market for more than $600, and many  $100 par value preferred stocks have traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be issued. New corporations can issue shares at prices well in excess of par value or for less than par value if state laws permit. Par value gives the accountant a constant amount at which to record capital stock issuances in the capital stock accounts. As stated earlier, the total par value of all issued shares is generally the legal capital of the corporation. Since the company may issue shares at different times and at differing amounts, its credits to the capital stock account are not uniform amounts per share.

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Notice how the
accounting is the same for common and preferred stock. Keep in mind your journal entry must always balance (total debits must equal total credits). Watch this video to demonstrate par and no-par value transactions. Notice how the accounting is the same for common and preferred stock.

On top of that, the accounting for the issuance of common stock differs from other sources. This accounting treatment also differentiates this finance source on the balance sheet. Before understanding the accounting for the allotment of common stock, it is crucial to know what it is. Assuming that the company XYZ still has a $100,000 outstanding balance of the additional paid-in capital account on the balance sheet before the issuance of these 10,000 shares of common stock. As mentioned, we may issue the common stock in exchange for the non-cash asset, such as land, building or equipment, etc. instead of the cash asset. It is lawful for a company to issue shares at a discount if several conditions are met.

Financial Accounting

This number is important because it serves as the basis for dividend payments as well as any votes taken of the stockholders. The number of issued shares is simply the quantity that has been sold or otherwise conveyed to owners. Kellogg reports that one billion shares of common stock were authorized by the state of Delaware but only about 419 million have actually been issued to stockholders as of the balance sheet date. The remaining unissued shares are still available if the company needs to raise money by selling additional capital stock.

Common shares without par value are journalized by debiting cash (asset) for the amount received for the shares and crediting common shares (equity) for the same amount. In this journal entry, we can debit the additional paid-in capital account only if there is an available balance (the credit side). However, if there is no available balance in the additional paid-in capital account, we will need to debit the retained earnings account instead. For example, on January 1, we hire an attorney to help in forming the corporation in which they charge us $8,000 for the service. However, instead of paying cash, we give the 1,000 shares of common stock to the attorney in exchange for the service instead.

The deficit of $2 per share ($8 minus $10) is called a discount on common stock. Common stock represents a company’s shares that provide various features. These features include the right to receive dividends and voting rights.

In the above journal entries, the debit side involves the bank account. However, some companies may also issue shares in exchange for other instruments, for example, convertibles or warrants. Similarly, some companies may offer stock to pay suppliers for their products or services. Nonetheless, the credit side will remain the same in most share issues.

When treasury stock is purchased by the board of directors, it is listed as a debit to the treasury stock account and a credit to the cash account. If the company issues only one type of stock, it is common stock. The investors become owners of the company and are called stockholders. In this journal entry, both assets and equity increase by $20,000. Also, there is no additional paid-in capital as the company issues the stock at the par value.

The transaction will increase the cash balance base on the sale proceed. At the same time, it will increase the equity components which include common shares and additional paid-in capital. Stock can be issued in exchange for cash, property, or services provided to the corporation. For example, an investor could give a delivery truck in exchange for a company’s stock. The general rule is to recognize the assets received in exchange for stock at the asset’s fair market value.

In some cases, capital also refers to human resources, Machinery, building, and land. There are two main sources of capital that the company can use to raise more cash to support operations. The deficits in share capital cannot be treated like discounts on shares. If any deficit still exists, then the company has to carry forward the amount and set it off against the capital whenever direct allocation method profits are made. Second, the above-mentioned resolution must specify the maximum rate of discount (not exceeding 10% or a higher rate fixed by the authority) at which the shares are to be issued. The first condition is that the issue of the shares at a discount must be authorized by a resolution passed at the company’s general meeting, and it must be sanctioned by the authority.

Those shares could have been sold on the stock exchange to raise that much money. Instead, Maine issues them directly in exchange for the land and records the transaction as follows. Kellogg records the issuance of a share of $0.25 par value common stock for $46 in cash as follows3.

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