Is Preferred Stock an Asset or Liability?

by Marquis Codjia; Updated September 26, 2017

Common stockholders and preferred shareholders provide much needed cash to all types of organizations, including stalwart multinational firms and smaller market players. Given their preeminence in the way companies fund operating activities, accounting rules require bookkeepers and accountants to accurately record stock-related transactions -- distinguishing such items as asset, liability and preferred stock.

Preferred Stock

Preferred stock is a class of equity that gives holders specific privileges. For example, preferred stockholders receive dividends before holders of other classes of capital, particularly common stockholders. In a business-liquidation scenario or bankruptcy proceedings, preferred shareholders' claims have precedence over the rights of common shareholders. Given the importance of preferred stockholders in a company's ownership structure, dividend policies often reflect the seriousness of corporate management in cultivating good ties with the investment community. By regularly making cash distributions to financiers, top leadership takes steps necessary to satisfy them and secure future funding along the way.

Asset

Assets are strategic resources a business relies on to ease its path toward economic stability. For a company, adequately recording corporate assets is essential to maintaining a squeaky-clean image in the marketplace. Accurate disclosures about the firm's assets indicate valuable data about such short-term resources as cash, merchandise, notes receivable, marketable securities and customer receivables. These items serve in operating activities for less than 12 months. Long-term assets, those resources serving companies for more than one year, include real property and equipment. Accountants also use the terms "tangible asset" and "fixed resource" to describe a long-term asset.

Liability

A liability is a debt a borrower must settle on time and in accordance with the terms of the loan agreement. It also can be a non-financial promise that a debtor must honor. For example, a company guaranteeing the debt of a subsidiary is liable if the affiliated firm defaults. In liability management, companies weigh the merits of short-term debt administration against the increased debt burdens that long-term loans often create. Short-term liabilities become due within one year. Examples include accounts payable and salaries. Long-term debts mature after 12 months and include bonds payable.

Financial Accounting and Reporting

Technology has penetrated the global marketplace and helped organizations accurately record transactions related to preferred stock, assets and liabilities. Corporate bookkeepers use such tools as financial analysis software to record operating activities. To record the issuance of preferred stock, a bookkeeper debits the cash account and credits the preferred stock account. This entry increases company money, because the accounting concepts of debit and credit are distinct from the bank terminology.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.