Accounting for Preferred Shares

To raise capital, a company may either sell stock or finance through debt. There are two main types of stock, preferred and common stock. Preferred stock usually pays higher dividends than common stock. Preferred stock has several main categories: callable, convertible, cumulative and participating.

When to Account for Preferred Stock

The main times accountants must record journal entries for preferred stock are when issuing the stock, paying dividends on the stock and buying back the stock.

Callable Preferred Stock

Callable preferred stock is stock that management can buy back at a set price. Accountants must record when management calls preferred stock.

Convertible Preferred Stock

Convertible preferred stock allows the owner of the stock to convert the preferred stock into common stock. Accountants must account for conversion when it occurs. When calculating earnings per share, treat the conversion as if it occurred at the beginning of the year.

Cumulative Preferred Stock

Cumulative Preferred Stock entitles an owner to a share of dividends even if management does not declare dividends for a period. An accountant must account for these unpaid dividends under dividends in arrears.

Participating Preferred Stock

Participating Preferred Stock allows owners to receive two dividends, one for their specified rate and another usually equal to the amount common shareholders receive. Accountants must calculate these dividends separately and report the dividends when declared and when paid.

References

• Investopedia: Preferred Stock
• Investopedia: Callable Preferred Stock
• Investopedia: Convertible Preferred Stock
• Investopedia: Cumulative Preferred Stock
• Investopedia: Participating Preferred Stock