Investors, or stockholders, contribute equity to a company when the company issues them stock in exchange for cash. A company raises equity for a variety of reasons, such as to increase spending on its operations and to buy assets. Equity from stockholders represents ownership in the company. The cash received from stockholders represents a cash inflow on the company's cash flow statement and increases the stockholders' equity on its balance sheet. You can report equity from investors to show financial statement users the effect of the new money on your company's financial position.
1. Determine the number of common shares you issued to investors, the issue price per share and the par value per share. The issue price per share is the price investors paid per share of stock. The par value per share is a small value per share you designate for accounting purposes. For example, assume you issued 80,000 common shares to investors with a $5 per-share issue price and a par value of $1 per share.
2. Multiply the number of shares by the par value per share to calculate the total par value. In this example, multiply 80,000 by $1 to get an $80,000 par value.
3. Multiply the number of shares by the issue price per share to calculate the total proceeds from issuing stock. In this example, multiply 80,000 by $10 to get $800,000 in total proceeds from issuing stock.
4. Subtract the total par value from the total proceeds to calculate the paid-in capital in excess of par. In this example, subtract $80,000 from $800,000 to get $720,000 in paid-in capital in excess of par of common stock.
5. Write "Common Stock" and its total par value as a line item in the "Stockholders' Equity" section of your balance sheet. In this example, write "Common Stock $80,000."
6. Write "Paid-in Capital in Excess of Par" and its amount as another line item below the "Common Stock" line item in the "Stockholders' Equity" section of your balance sheet. In this example, write "Paid-in Capital in Excess of Par $720,000."
7. Write "Proceeds from Issuing Stock" and the amount of total proceeds as a line item in the "Cash Flows from Financing Activities" section of your cash flow statement to represent the cash inflow. In this example, write "Proceeds from Issuing Stock $800,000."
- Stockbyte/Stockbyte/Getty Images