A tale of how businesses seek operating funds often resembles the way persistent toddlers attempt to crawl and gradually walk. It takes patience, determination and an unwavering commitment to long-term success. For a new company, the ability to issue common stock is a confidence booster, as it reflects investor interest in the venture. Regulatory guidelines dictate the normal balance of common-stock accounts and how bookkeepers should record stock transactions.
Common stock reflects traditional shares of equity that a publicly traded firm issues. The company does so to raise funds by giving investors a portion of its equity. Economists often describe this transaction by saying that the firm is opening its equity structure. They contrast common stock to preferred stock, a class of equity which carries more benefits. For example, preferred shareholders receive dividends before common stockholders. This can be a strategic and financial advantage, especially if the dividend-paying institution has limited funds.
Statement of Stockholders' Equity
Common stock is a component of the statement of stockholders’ equity, also known as a statement of retained earnings or report on shareholders’ capital. Financial accountants also record common stock on the balance sheet, specifically in the equity capital section of the report. Equity, or net worth, equals corporate assets minus debts. Other financial statements include balance sheets, statements of cash flows and reports on profit and loss. Balance sheets also are known as statements of financial position or statements of financial condition.
As an equity account, common stock always has a credit balance. To record common stock issuance, a bookkeeper -- also known as a junior accountant -- makes specific entries. The accountant debits the cash account and credits the common stock account. The bookkeeper also credits an account called “additional paid-in capital” (APIC) to record the difference between the share issuance price and its par value. This is unrelated to market value and means face value or stated value.
A United States-based publicly traded firm issues 1 million shares at $5 apiece on the New York Stock Exchange. NYSE officials indicate that issuance documents show the share’s par value is $1. Consequently, the company receives $5 million, or 1 million multiplied by $5, in its coffers. To record the transaction, a corporate bookkeeper makes some preliminary calculations. The junior accountant finds that common stock capital equals $1 million, or 1 million times $1. The accountant also calculates that APIC equals $4 million, or $5 million minus $1 million. To record the transaction, the bookkeeper debits the cash account for $5 million, crediting the APIC and common stock accounts for $4 million and $1 million, respectively.