Corporations decide to issue stock when their financial plans require the company to acquire additional funding. To issue stock, the company must first gain approval from the Securities and Exchange Commission, or the SEC. Once the SEC approves the company’s request, the company determines a selling price for the stock. Each share of stock includes a par value. The par value represents an arbitrary dollar amount assigned to each share. Companies usually issue stock at a price above par. The company records the stock issuance in the accounting records through a journal entry.
When the company sells stock, the investor pays cash. The investor receives the right to collect future dividends that the company declares and the right to sell the shares to interested buyers on the stock market. In the journal entry to record the stock issuance, the company debits cash for the amount of money received. Cash is an asset account and increases with a debit entry.
When the stock issuance occurs, the company issues the shares of stock to the investor. The company needs to record the common stock issued in the accounting records. In the journal entry, the company records a credit to common stock for the number of shares issued multiplied by the par value. Common stock is an equity account and increases with a credit entry.
Paid-in Capital in Excess of Par
The investor typically pays more for the stock than the par value. The company calculates the additional money received by taking the issue price minus the par value and multiplying it by the number of shares issued. This amount is recorded as paid-in capital. In the journal entry, the company records a credit to paid-in capital for this dollar value. Paid-in capital in excess of par represents an equity account and increases with a credit.
Reporting Stockholders' Equity Accounts
Both the common stock and the paid-in capital accounts result from selling stock and increasing the company’s stockholders' equity. The company reports stockholders' equity on the balance sheet. The first account listed under stockholders' equity is the common stock account. After common stock, the company lists the paid-in capital account.