In accounting, this term describes the total finance received from a company’s shareholders over the years. Companies may also refer to it as ordinary stock, which represents the same concept. In most circumstances, common stock is the only type of equity instrument that companies may issue. In exchange for these instruments, the company issues shares, which provide the holder with several rights. The latter source of finance comes from third parties, such as banks and other financial institutions.

Accounting for Issuance of Common Stock: Example, Journal Entries, and More

1. When stock is repurchased for retirement, the stock must be removed from the accounts so that it is not reported on the balance sheet.
2. When stock is sold to investors, it is very rarely sold at par value.
3. Dividends are not paid on treasury shares, they provide no voting rights, and they do not receive a share of assets upon liquidation of the company.
4. If a company decides to issue stock to raise capital, this transaction needs to be recorded in the company’s books.
5. In addition to the non-cash asset, we may also issue the common stock in exchange for the service instead.

This capital is used by the company to fund operations, invest in assets, and pay salaries. When a company issues common shares, it is selling ownership in the company to investors in exchange for cash. These investors then become shareholders, and their ownership stake in the company is based on the percentage of shares they hold. Issuing share capital allows companies to raise the funds they need to grow and develop. When a corporation issues common stock at par value, the amount of cash or non-cash assets received equal to the value of the common stock.

Reissuing Treasury Stock above Cost

For example, Kellogg discloses a par value of $0.25 for its common stock, which is actually quite high. Many companies report par values that fall between a penny and a nickel. The balance sheet for Barnes & Noble shows a par value for its common stock of one-tenth of a penny. DeWitt carries the $ 30,000 received over and above the stated value of  $200,000 permanently as paid-in capital because it is a part of the capital originally contributed by the stockholders.

For that, it is crucial to separate the par value of shares from the total finance received. Assume Duratech’s net income for the first year was $3,100,000, and that the company has 12,500 shares of common stock issued. During May, the company’s board of directors authorizes the repurchase of 800 shares of the company’s own common stock as treasury stock. Each share of the company’s common stock is selling for $25 on the open market on May 1, the date that Duratech purchases the stock. Duratech will pay the market price of the stock at $25 per share times the 800 shares it purchased, for a total cost of $20,000. The following journal entry is recorded for the purchase of the treasury stock under the cost method.

The rights of the holders of common stock shares are normally set by state law but include voting for a board of directors to oversee current operations and future plans. Financial statements often indicate the number of authorized shares (the maximum allowed), issued shares (the number that have been sold), and outstanding shares (those currently in the hands of owners). 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.

What are the journal entries for the Issuance of Common Stock?

Treasury stock transactions have no effect on the number of shares authorized or issued. Because shares held in treasury are not outstanding, each treasury stock transaction will impact the number of shares outstanding. When stock is repurchased for retirement, the stock must be removed from the accounts so that it is not reported on the balance sheet. The balance sheet will appear as if the stock was never issued in the first place. Notice on the partial balance sheet that the number of common shares outstanding changes when treasury stock transactions occur.

Journal Entries for the Issuance of Common Shares

Kellogg records the issuance of a share of $0.25 par value common stock for $46 in cash as follows3. Of course, the par value of the common stock has nothing to do with its market value. And the real value of how much a company’s shares are actually worth and sold for is why operations management is important for your company the market value, not the par value. The par value of the common stock nowadays is usually just the number on the paper.

In this case, we can make the journal assign antonym entry for the issuance of common stock at par value with the debit of the cash account and the credit of the common stock account. The company charges $150 per share for this issuance, making the overall finance received $150,000. However, the par value of those shares is $100, making the total par value of those shares $100,000.

PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The issuance of stock is indeed a potent tool that, when deployed strategically, can infuse the company with new life, creating avenues for growth and expansion. 2Many other laws have been passed over the years that have been much more effective at protecting both creditors and stockholders. For instance, if a company has a successful launch of an IPO or subsequent public offering, it may indicate strong market support and high investor confidence. This not only provides financial resources but also boosts the company’s reputation and recognition.

It can be a strategic maneuver to prevent another company from acquiring a majority interest or preventing a hostile takeover. A purchase can also create demand for the stock, which in turn raises the market price of the stock. Sometimes companies buy back shares to be used for employee stock options or profit-sharing plans. If this stock was not selling on a stock exchange, fair value might not be apparent. In that situation, the Maine Company should recognize the land at its own fair value of $125,000 with an accompanying $5,000 increase in the capital in excess of par value account. To illustrate, assume that a potential investor is willing to convey land with a fair value of $125,000 to the Maine Company in exchange for an ownership interest.

Common Stock consists of the par value of all shares of common stock issued. Additional paid-in capital from common stock consists of the excess of the proceeds received from the issuance of the stock over the stock’s par value. When a company has more than one class of stock, it usually keeps a separate additional paid-in capital account for each class. The journal entries for the issuance of common stock impact three accounts. The first involves the debit side, which usually includes the account to record the compensation.

This is due to a lack of interest from investors and there is only one investor is willing to pay $8 per share for 1,000 shares. The deficit of $2 per share ($8 minus $10) is called a discount on common stock. New stock issuance can affect the existing shareholders’ voting rights, control of the company, net worth, and claim on future earnings. This is due to the dilution effect, where the ownership stake of existing shareholders is lessened as more shares are issued. Just after the issuance of both investments, the stockholders’ equity account, Common Stock, reflects the total par value of the issued stock; in this case, $3,000 + $12,000, or a total of $15,000. The amounts received in excess of the par value are accumulated in the Additional Paid-in Capital from Common Stock account in the amount of $5,000 + $160,000, or $165,000.