A corporation has the ability to issue common stock as a way to raise money to finance the company’s business activities. To ensure accuracy in terms of record keeping, a corporation must record the issuance of common stock in the company’s general journal. Common stockholders have the ability to choose a company’s board of directors, and vote on whether to merge with or acquire other companies. Common stock exists as a balance sheet account that illustrates the capital owners have invested in the business.
1. Calculate the selling price of the common stock. For instance, a company that issues 100,000 shares of common stock with $1 par value at $10 per share has a selling price of 1,000,000 on common stock. Par value is the minimum selling price of a company’s common stock. In this scenario, the par value of the 100,000 shares is $100,000 because $1 multiplied by 100,000 shares equals $100,000.
2. Record the date of stock issuance in the general journal. Write the exact day and month when the company issued common stock.
3. Debit the company’s cash account for the applicable amount. If a company received $1,000,000 in exchange for 100,000 shares of common stock, the company must debit its cash account for $1,000,000. This entry illustrates an increase in the company’s cash account.
4. Credit the company’s common stock account for the par value amount. Multiply the number of shares by the common stock’s par value. Assuming 100,000 shares of common stock were issued with a $1 par value, then the credit to common stock must equal $100,000. However, you must make another entry to account for the difference between the common stock’s par value and the actual selling price of the common stock.
5. Credit additional paid-in capital for the difference between selling price and par value. For instance, if a company sold 100,000 shares of common stock for $1,000,000 when the par value of the common stock equals $100,000, then the additional paid-in capital amount equals $1,000,000 minus $100,000. In this scenario, the company must credit additional paid-in capital for $900,000. This step is not necessary for companies that issue common stock at par value, because there is no additional paid-in capital to record.
Items you will need
- General journal
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