How to Record the Issuances of Common Stock

by Cynthia Hartman

Public companies use different types of stock to raise equity -- typically common or preferred stock. Common stock grants shareholders the right to declared common dividends, voting rights on general corporate governance issues, rights to periodic financial statement reports and the right to share in a company's liquidation value after all creditors and other priority claims receive payment. When a firm issues common stock it must record the ownership change on its balance sheet.

1. Identify the per-share "par value" assigned to the issued stock. Company management determines the par value, and it has no relation to the stock's market value. Par value is also known as a stock's face value or stated value.

2. Set up a "common stock" account on the company books. This account resides on the balance sheet, in the stockholders' equity section. The common stock represents all of the equity common shareholders own in the company.

3. Set up a "paid in excess of par" account on the company books. This account also resides in the stockholders' equity section of the company's balance sheet.

4. Record the first entry to document the receipt of cash from shareholders in exchange for the issued common stock. For example, a company issues 100,000 shares of common stock at $1 par value per share, with an issue price of $10 per share. Record the cash receipt for 100,000 shares of common stock at $10 per share, or $1 million, as a debit, or increase, to the cash account on the company's balance sheet.

5. Record the second entry, which concerns the par value portion of the common stock issued. The par value of the common stock, $1 per share, goes in the common stock account on the balance sheet. The entry should credit, or increase, the common stock account balance.

6. Record the final entry of the common stock transaction. The rest of the shares' value, $10 minus $1 par value or $9 per share, is recorded into the "paid in excess of par" account on the balance sheet. The entry credits, or increases, the account balance by $900,000.

7. Some firms may choose to issue stock with no par value, which simplifies the entry. In this case, the accountant debits, or increases, cash and then credits, or increases, common stock using the stock's issue price. This transaction does not require a separate account or entry for "paid in excess of par."

About the Author

Cynthia Hartman started writing in 2007 and has written for several different websites. She brings more than 20 years of experience in finance and business ownership. Hartman holds a Bachelor of Science in finance and business economics from the University of Southern California.

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