When investors buy shares of common stock issued by a corporation, the business realizes a cash inflow, which increases stockholders' equity. Once the shares are sold, they remain in circulation on the stock market and investors are continually buying and selling the shares. The company only makes money off the first sale of the stock.
Stockholders' Equity Accounts
A stockholders’ equity account is an asset account that includes common stock, preferred stock and retained earnings, among other assets. When a company sells common stock, it credits the common stock asset account. At the end of the company's tax year, the balance in the common stock asset account is transferred to the company’s balance sheet. Common stock is reported under the “Stockholders’ Equity” section on the corporate balance sheet.
Selling Common Stock
When a company prepares to sell common stock, it authorizes a certain number of shares based on estimated current and future capital needs. These shares are called “authorized shares.” When the company sells the shares to investors, they are called “issued shares.” When a company buys back some of its issued shares, the shares are called “treasury stock.” Issued common stock minus treasury stock represents the number of common shares outstanding.
Recording Common Stock
When a company records the sale of common stock in its common stock asset account, it only records the amount of common stock outstanding. It does not record treasury stock in this account. Common stock outstanding and treasury stock are reported as separate line items on the balance sheet at the end of the year. Treasury stock is a contra asset account. Unlike common stock that has a credit balance, treasury stock has a debit balance and decreases stockholders' equity.
Selling Authorized Shares
Corporations typically authorize more shares than they issue based on estimated future capital needs such as expansions and acquisitions. When it comes time for the company to finance an expansion or acquisition, it will issue or sell additional authorized shares. When this occurs, the company records the proceeds from the issued shares in the common stock asset account, which increases stockholders' equity on the balance sheet.