common stock on balance sheet
What Is Affected on a Balance Sheet if More Stocks Are Issued?
Share certificate issuance proceeds appear in two places on the balance sheet.
All corporations are authorized to issue stock to investors, whether the corporation is publicly traded or not. A stockholder is generally assigned a percentage of ownership in the company, based on the percentage of stock he owns. There is a difference between the number of shares a company is authorized to issue and the number of shares actually issued. When you issue stock to shareholders, you must adjust two accounts on your balance sheet to record the transaction.
The amount of stock you issue differs from the amount of stock your company is authorized to issue. When you establish a corporation, the number of shares your business is authorized to issue is listed on your Articles of Incorporation filed with the state where you transact business. When shares are actually issued, the remaining number of shares your company is authorized to issue decreases. Authorized shares may be reported on the balance sheet. However, reporting the authorized, but unissued, shares of stock serves more as a tool for keeping track of the number shares that can still be issued. Authorized shares have no monetary value until they're sold.
Many states require companies to list the par value, or stated value, of each share of stock the company is authorized to issue. Values are generally set when you establish a corporation. Although you set a per-share value, you may actually receive more than the par value when you issue stock to shareholders. When this occurs, you receive capital in excess of par value and must reflect the additional capital on your balance sheet accordingly.
The first balance sheet account affected by issuing stock is the cash account. The cash account increases by the amount your company receives for the purchased stock. If you receive capital in excess of par value, you must create two cash account entries to allocate the money received for each category. For example, if you issue a share of stock for $20 that has a par value of $1, make one entry labeled “Common Stock, Par-Value -$1” and a second entry labeled “Capital in Excess of Par-Value - $19” to your balance sheet cash account. The effect of the entries increases your account by $20 and the allocation of funds is recorded.
The effect on the Stockholder’s Equity account from the issuance of shares is also an increase. Money you receive from issuing stock increases the equity of the company’s stockholders. You must make entries similar to the cash account entries to the Stockholder’s Equity account on your balance sheet. Using the figures from the example above, the first entry is labeled “Common Stock – Par Value $1.” Enter the number of shares you issued with the transaction and the number of shares your company is still authorized to issue. These figures must reflect the decrease in the number of authorized shares. The par value collected from the issued stock must be recorded on the right side of the balance sheet. Next, create an entry that reads “Paid-in Capital in Excess of Par Value.” Record the excess capital you received on the right side of the balance sheet. Label a third balance sheet entry “Total Paid-in Capital” and list the sum of your two previous entries. The result equals the total amount you receive from the stock issuance, and the total increase to the Stockholder’s Equity account.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.
Cite this Article
[Loan Affect] | How Does a Loan Affect an Accounting Equation?
[Authorized Stock] | What Is the Difference Between Authorized Stock and Issued Stock?
[Common Stock Outstanding] | The Differences Between Common Stock Outstanding & Issued
[Company Issuing Additional Common Stock] | The Implications of a Company Issuing Additional Common Stock
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Working capital is not affected when a company buys securities with cash, since current assets include both cash and securities. A typical exam question will offer that scenario and then ask which balance sheet items are affected. Working capital will be an incorrect answer.
- Commonand preferred stock - on the balance sheet, only the par value of both classes of stock is used, not the market value. (Par value is a dollar amount assigned to a security when first issued. For stocks, par value usually is a small amount that bears no relationship to its market price.) This par value is multiplied by the number of outstanding shares.
You can expect only one or two questions on financial statements, such as:
The correct answer is "b", since cash (a current asset) will decrease, this also decreases working capital. Furthermore, furniture is a fixed asset, not a current asset; and net worth is only affected by profit, loss or dividend payout.
Recording Common Stock on a Balance Sheet
A company’s balance sheet reflects its financial position for a specific period, usually over the course of a fiscal quarter or year. A balance sheet is divided into the three main accounts of assets, liabilities and stockholder’s equity. Common stock is recorded in the stockholder’s equity section of a balance sheet.
A balance sheet displays a company’s assets and liabilities. The asset side on the right of the balance sheet displays what the company owns, such as property, equipment, investments, cash and accounts receivable. The left side of the balance sheet displays the company’s debts, which include accounts payable and notes payable The total assets on the right, must equal total liabilities and stockholder’s equity, on the left.
In its corporate charter, a company may choose to assign either a par value or stated value for common stock. Both values are arbitrary and typically assigned for accounting purposes only. It is not the same as market value. Companies cannot issue common stock shares for less than its par or stated value. When common stock has an assigned par or stated value, multiply the number of shares outstanding by the par or stated value per share. This amount is recorded as common stock in the shareholder’s equity section of a balance sheet.
Additional paid-in capital is also referred to as paid-in capital in excess of par on the balance sheet. The additional paid-in capital is the amount of cash received from the sale of stock shares in excess of the par or stated value of the shares. For example, assume a company issues 100 shares with a stated value of $10 per share, and investors purchase all 100 shares at $15 per share. The company’s additional paid-in capital is $5 per share multiplied by 100 shares. The company records $500 in additional paid in capital in the stockholder’s equity section of its balance sheet.
As an example, assume a company issues 1,000 common shares with a stated value of $5 per share, and investors purchase all 1,000 shares for $15 per share. The total value of outstanding shares is $15,000. The company records common shares for $5,000 (1,000 shares outstanding x $5 stated value per share) in the shareholder’s equity section on their balance sheet. Each investor paid $10 per share in excess of the stated value, and $10 in excess of par multiplied by 1,000 shares outstanding equals $10,000. The $10,000 additional paid-in capital and the $5,000 stated value added together, equals the total value of shares outstanding of $15,000.
Effect of Issuing Common Stock on the Balance Sheet
Effect of issuing common stock on the balance sheet
Newly formed Electronics Services Corporation has 100,000 shares of $10 par common stock authorized. On March 1, 2014, Electronics Services issued 20,000 shares of the stock for $12 per share. On May 2 the company issued an additional 30,000 shares for $15 per share. Electronics Services was not affected by other events during 2014.
a) Record the transactions in a horizontal statements model like the following one. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an element was not affected by the event.
b) Determine the amount Electronics Services would report for common stock on the December 31,2014 balance sheet.
c) Determine the amount Electronic Services would report for paid-in capital in excess of par
d) What is the total amount of capital contributed by the owners?
e) What amount of total assets would Electronics Services report on the December 31, 2014 balance sheet?
Recording and reporting common and preferred stock transactions
Goldman Inc. was organized on June 1, 2014. It was authorized to issue 500,000 shares of $10 par common stock and 100,000 shares of 4 percent cumulative class A preferred stock. The class A stock had a stated value of $50 per share. The following stock transactions pertain to Goldman Inc.:
1. Issued 40,000 shares of common stock for $16 per share.
2. Issued 20,000 shares of the class A preferred stock for $52 per share.
3. Issued 60,000 shares of common stock for $20 per share.
Prepare the stockholders' equity section of the balance sheet immediately fter these transactions have been recognized.
Compute the Cash received at par value and Paid-in Excess of par value for each date. Par value is $10. Only compute the amounts using the issued shares, not the authorized shares.
For the shares issued on March 1, 2014:
Com Stk = 20,000 X $10 = $200,000
Paid-in excess = 20,000 X ($12 - $10) = $40,000
For the shares issued on May 2, 2014:
Com Stk = 30,000 X .
This solution contains step-by-step computations for each problem is shown in 2 pdf files. All required answers are given. An Excel file showing computations for the table for question #1, and stockholders' equity section of the balance sheet for question #2 are given.
Definition of common-size balance sheet
balance sheet that presents items as a percentage of total assets.
The difference between exports and imports of goods.
A statistical compilation formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
The difference between the demand for and supply of a country's currency on the foreign exchange market.
A statement of a country's transactions with other countries.
Net flow of goods (exports minus imports) between countries.
See balance of merchandise trade.
Also called the statement of financial condition, it is a summary of the assets, liabilities, and
A “snapshot” statement that freezes a company on a particular day, like the last day of the year, and shows the balances in its asset, liability, and stockholders’ equity accounts. It’s governed by the formula:
Assets = Liabilities + Stockholders’ Equity.
A financial statement showing the financial position of a business – its assets, liabilities and
capital – at the end of an accounting period.
One of the basic financial statements; it lists the assets, liabilities, and equity accounts of the company. The balance sheet is prepared using the balances at the end of a specific day.
A term often used instead of the more formal and correct
term—statement of financial condition. This financial statement summarizes
the assets, liabilities, and owners’ equity sources of a business at a
given moment in time. It is prepared at the end of each profit period and
whenever else it is needed. It is one of the three primary financial statements
of a business, the other two being the income statement and the
statement of cash flows. The values reported in the balance sheet are the
amounts used to determine book value per share of capital stock. Also,
the book value of an asset is the amount reported in a business’s most
recent balance sheet.
A report that summarizes all assets, liabilities, and equity for a company
for a given point in time.
Financial statement that shows the value of the
firm’s assets and liabilities at a particular time.
A financial report showing the status of a company's assets, liabilities, and owners' equity on a given date.
Total Assets = Total Liabilities + Total Stockholders' Equity
The multiplier associated with a change in government spending financed by an equal change in taxes.
An investment company that invests in stocks and bonds. The same as a balanced mutual fund.
This is a fund that buys common stock, preferred stock and bonds. The same as a
A system of non-financial performance measurement that links innovation, customer and process measures to financial performance.
an approach to performance
measurement that weighs performance measures from four
perspectives: financial performance, an internal business
perspective, a customer perspective, and an innovation and
In a balance of payments, the basic balance is the net balance of the combination of the current
account and the capital account.
The theoretical amount per share that each stockholder would receive if a company’s assets were sold on the balance sheet’s date. Book value equals:
(Stockholders’ equity) / (common stock shares outstanding)
Cash flow from operations minus preferred stock dividends, divided by the
number of common shares outstanding.
The representing of accounting information over multiple years as percentages
of amounts in an initial year.
common-size analysis The representing of balance sheet items as percentages of assets and of income
statement items as percentages of sales.
the minimum set of knowledge needed by a person to function effectively in a particular field
An agreement between two or more countries that permits the free movement of capital
and labor as well as goods and services.
Are equity instruments that take no security against assets, have no fixed terms of repayment and pay no fixed dividends.
Income statement that presents items as a percentage of revenues.
These are securities that represent equity ownership in a company. common shares let an
investor vote on such matters as the election of directors. They also give the holder a share in a company's
profits via dividend payments or the capital appreciation of the security.
Shares of ownership sold to the public.
A financial security that represents an ownership claim on the
assets and earnings of a company. This claim is valid after the
claims of the debt providers and preferred stockholders have been
Ownership shares in a publicly held corporation.
That part of the capital stock of a corporation that carries voting rights and represents
the last claim on assets and dividends.
A convertible security that is traded like an equity issue because the optioned
common stock is trading high.
The market for trading equities, not including preferred stock.
Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.
Ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.
An excess balance that is left in a bank to provide indirect compensation for loans
extended or services provided.
The rate of return required by the investors in the common stock of
the company. A component of the cost of capital.
An accelerated depreciation method that calculates depreciation each year by applying a fixed rate to the asset’s book (cost–accumulated depreciation) value. Depreciation stops when the asset’s book value reaches its salvage value.
A method of depreciation.
Method of accelerated depreciation.
Earnings per share of common stock
How much profit a company made on each share of common stock this year.
a source document that indicates, for each employee, what jobs were worked on during the day and for what amount of time
a source document that provides virtually
all the financial information about a particular job;
the set of all job order cost sheets for uncompleted jobs
composes the Work in Process Inventory subsidiary ledger
Abrams’ model to calculate discount rates as a function of the logarithm of the value of the firm.
Financial statement that uses the market value of all assets and liabilities.
Beginning cash balance plus cash receipts minus cash disbursements.
Financing that is not shown as a liability in a company's balance sheet.
The quantity of inventory currently in stock, based on inventory
The future planned balance of an inventory item,
based on the current balance and adjusted for planned receipts and usage.
The percentage of a month's sales that remain uncollected (and part of
accounts receivable) at the end of succeeding months.
The amount of principal dollars remaining to be paid under the mortgage as of
a given point in time.
A measure of the percentage return earned on the value of the
common equity invested in the company. It is calculated by
dividing the net income available for distribution to shareholders
by the book value of the common equity.
Large in size, as in the size of an offering, the size of an order, or the size of a trade. size is relative from
market to market and security to security. Context: "I can buy size at 102-22," means that a trader can buy a
significant amount at 102-22.
A computer program that organizes numerical data into rows and columns on a terminal screen,
for calculating and making adjustments based on new data.
Optimal amount of cash for a firm to hold, considering the trade-off between the
opportunity costs of holding too much cash and the trading costs of holding too little cash.
A list of the major points of the proposed financing being offered by an investor.
A listing of all the accounts and their balances on a specified day.
Regional bank account to which just enough funds are transferred daily to pay each day’s bills.
A checking account in which zero balance is maintained by transfers of funds
from a master account in an amount only large enough to cover checks presented.
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