Does Issued Capital Stock for Cash Increase a Stockholder's Equity?
Businesses need assets to start, maintain and run their main operations. A company can acquire these economic resources either through incurring debts and other such obligations to other economic entities or through receiving them as investment from their owners. Obligations incurred to other economic entities are called liabilities, while obligations to the business’ owners are called equity. Economic resources added to the business by its owners count as increases to its equity.
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Stockholders’ Equity
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Equity is variously called owner’s equity or stockholders’ equity depending on whether the business is a sole proprietorship, a partnership, or a corporation and thus whether its owners are owners, partners, or stockholders. Stockholders hold shares in the corporation’s capital stock and thus can be considered the corporation’s owners.
Capital Stock Shares
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Corporations raise much of the economic resources to be used to start their operations through selling shares in their capital stock to investors. Different classes of such shares offer different benefits and responsibilities to their holders. But in the case of common shares that let their holders vote on important corporate decisions, such shares can be considered shares in the corporation’s ownership. All shares a corporation issues raise its stockholders’ equity.
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Paid-In Capital
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Economic resources raised through payments by stockholders are collected under the account called paid-in capital. This account is equal to the number of shares sold by the corporation to investors multiplied by the price at which the corporation issued them. Multiple classes of shares offered by the same corporation are accounted for using multiple paid-in capital accounts.
Issuance of Stock Shares
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Stock shares being traded on the stock market between investors do not affect the corporation’s accounts because they are already out of the corporation’s hands. Corporations’ stockholders’ equity only increases if the shares in question are being sold for the first time and are thus being issued by the corporation in exchange for payment from investors. Corporations have free say over the price at which it issues these shares unless it has made promises regarding their issuance price.
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