A company can sell shares of stock to raise large amounts of debt-free capital. It can also buy shares from other corporations as an investment or acquisition strategy. Purchase agreements can take the form of short-term purchase orders for buying goods on credit, or long-term lease purchase agreements for capital assets. Accountants make different entries for each type of stock transaction and purchase agreement. Understanding how to account for each type of transaction is a must for aspiring corporate accountants and CPAs.
Corporations can sell stock for cash or assets, or they can offer stock as payment for services received. To record a simple stock transaction for cash, debit cash and credit common or preferred stock for the amount of the transaction. If the buyer pays more for each share than the stock's par value, debit cash for the amount received. Then credit common or preferred stock for the total par value of the stocks sold, and credit the additional paid-in capital account for the remaining balance. When selling stock for assets, debit the specific asset account and credit common or preferred stock. When trading stock for services rendered, debit the specific liability account and credit the appropriate stock account.
Private companies, corporations and self-employed investors make accounting entries to track purchases of stock shares. Public companies can also buy back shares of their own stock from investors. When a company buys back stock without retiring it, the repurchased shares are known as treasury stock. To account for purchases of other companies' stock, credit cash for the amount of the transaction, and debit the specific account you use to keep track of stock holdings. To account for stock buybacks, credit cash and debit the treasury stock account.
Lease Purchase Agreements
Businesses often enter into long-term lease purchase agreements for large capital expenditures, such as buildings and production equipment. These purchase agreements require multiple accounting entries over the life of a debt. To make the initial entry for a long-term lease purchase, debit the appropriate asset account and credit accounts payable. As you make payments on the asset, gradually decrease the amount in accounts payable by crediting the cash account and debiting accounts payable.
Purchase agreements can be as simple as payment invoices accompanying delivered goods. Accountants can record purchase agreements before payment has been made in full for a number of reasons, including to prepare financial statements at year-end. To record a simple purchase agreement, debit the specific asset account used for the purchased goods, and credit accounts payable. To account for purchase returns and allowances for damaged or sub-par goods, debit accounts payable and credit the purchase returns and allowances account.
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