Stockholders’ equity exists as a balance sheet account that indicates the ownership interest of a corporation’s shareholders. Stockholders’ equity has a normal credit balance, which means a credit to stockholders’ equity illustrates an increase in the amount of equity owners have in the business. A corporation must journalize every transaction to make it easier to prepare financial statements. Corporations have the ability to issue equity in the form of stock shares in exchange for cash and other assets. Issuing shares of stock allows a corporation to finance its activities without adding debt to the books.
1. Enter the date when the corporation issued the stock. Input the exact month and day of the stock issuance in the general journal.
2. Debit an asset account. Debit cash if the company receives cash in exchange for the stock issuance, or debit the asset the company receives in exchange for stock. When a company receives cash, record a debit for the amount of cash received. A company may issue shares of stock in exchange for legal or accounting services. In this instance, debit “legal services” or “accounting costs” for the appropriate amount. Debiting an asset illustrates an increase in the asset account, whether in the form of cash or services. Let’s assume a company issues $40,000 in common stock for cash. In this scenario, a corporation must debit cash for $40,000, which increases the amount of the company’s cash by $40,000.
3. Credit stockholders’ equity for the amount of shares issued. For example, a company that issues 10,000 shares at $4 per share must credit stockholders’ equity for $40,000, assuming that the company received par value for the shares. Par value is the minimum selling price per share. This journal entry shows a company issued $40,000 in equity and received $40,000 cash.
Items you will need
- General journal
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