Issuing stocks doesn't affect an income statement, but the transaction flows into accounts that interrelate with a statement of profit and loss -- the other name for an income statement. To understand how stock issuance meshes with financial accounting and reporting, it's important to make sense of the web of journal entries making up equity transactions.
Stock Issuance Basics
A company sells equity units -- or issues stocks -- to keep operational coffers flush with capital at a time when it doesn't generate enough revenues to weather a bad economy, produce quality products and deal with competitors head-on. Stock-issuing companies already awash in money are not unusual, though. To issue shares -- the other name for stocks -- a business canvasses the offices of investment bankers, who are professionals schooled in the minutiae of financial analysis, equity financing and securities regulatory compliance. The issuance takes place on securities exchanges as varied as the New York Stock Exchange, the London Stock Exchange and Germany's Deutsche Börse. Finance people often use the term "security" when referring to an investment product, such as a stock, bond or mutual fund.
Accounting for Stock Sale
When a company issues stocks, a bookkeeper debits the cash account, crediting the common stock account and the additional paid-in capital account. The common stock account and the additional paid-in capital account are integral to a statement of changes in shareholders' equity, also known as a retained earnings statement or report on stockholders' equity. "Stockholder" or "shareholder" is the name business reporters give to a person or company that pours money into a company's operating activities.
Investors delve into a company's statement of profit and loss to figure out whether the gap between top leaders' rhetoric and their actions is widening or tightening. If senior executives promised rosy performance in earlier utterances, a P&L is the data summary you review to evaluate whether they remain true to their words. In an income statement, a business displays revenues, expenses and net income -- or loss, if expenses exceed revenues. Money an organization derives through share issuance is not revenue. The corporation makes money by selling goods or providing services, not through cash inflows from investors.
There's a subtle linkup between stock issuance and an income statement although both items are distinct. When a company closes its books, accountants transfer net income into the retained earnings account -- which is a component of a stockholders' equity statement, similar to common stock and additional paid-in capital.