A business entity organized as a corporation issues shares of ownership -- equity -- to investors in exchange for capital. Accounting for stock issues is important, as it determines how much of the company's assets and dividends an owner is entitled to. Understanding the basic principles of corporate equity accounting helps business managers resolve confusion and prevent litigation.
Common Stock Issues
Many transactions in corporate equity accounting involve the issuance of shares of common stock. In most cases, this is a fairly straight-forward accounting transaction: the company debits its cash account and credits its common stock account. In other cases, the transaction may be more complicated, if the stock has a par value, it may be necessary to record cash received in excess of the par value in an account called additional paid-in capital. If the stock is to be issued publicly on a stock exchange, the accounting procedures for it will require the assistance of financial professionals.
Preferred Stock Issues
In addition to common stock, corporations may decide to issue to investors shares of preferred stock, or ownership rights that enjoy special privileges like first access to dividends or assets. Accounting for preferred stock issues is much the same as accounting for common stock -- a debit entry to the cash account and credit to preferred stock. Multiple preferred stock accounts may be created to keep track of different privileges enjoyed by different classes of preferred stock holders.
Initial Public Offerings
Companies that decide to issue their stock to public investors on a stock exchange must engage in an initial public offering. In an IPO, another company called an underwriter agrees to purchase shares from the issuer at a price determined by an agreement between the two companies. The underwriter is responsible for a careful review of the company's accounting and provides investors a degree of security by agreeing to assume the risks of underwriting the offering. In some cases, a company may decide to offer the shares themselves instead of working with an underwriter. In either situation, the shares may be common or preferred stock, and accounting is usually performed by financial professionals or major accounting firms.
Purchasing Shares in Other Companies
In some cases, companies will issue their shares directly to another company, as is the case with an underwriter in an IPO. The method used to account for this is determined by the proportion of the issuer that the buyer will own. In cases where the buyer owns less than 20 percent of the company, the issuer's stock will be recorded at its cost. If the buyer assumes more than 20 percent of the issuer's total equity, it is expected to enjoy a degree of control over the issuer's operations. In this case, the buyer regularly adjusts the value of the issued stock to account for earnings, losses and dividends, or will consolidate its financial statements with those of the issuer.
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