What Happens When a Company Receives Cash in Exchange for Issuing Stock?
Companies choose to issue stock to achieve various business goals -- to raise capital to buy new equipment and machinery, reduce the company's debts or to increase cash to pay vendors and new employees. While companies may issue preferred and common shares, common stock is a more widely issued, common source of capital funding.
When a company issues shares of stock, the transaction impacts the balance sheet and results in an increase to both the asset and equity balance. The company may issue common and preferred stock at a stated, or "par value" price, or at a price above its par value.
To show the balance sheet impact when stock is issued at its par value, assume that on April 1, a small corporation issues 500 shares at $100 par value to buy new equipment.
The accountant will record the following journal entry to the company's general leger:
Debit Cash 50,000 Credit Common Stock 50,000
The sale impacts the balance sheet, resulting in an increase to cash and an increase to the equity account -- common stock.
To illustrate the impact to financial statements when stock is issued above its par value, assume instead that on April 1, the corporation issued 500 shares of $100 par value stock at $125 per share.
The accountant will record the following journal entry to the company's general ledger:
Debit Cash 62,500 Credit Common Stock 50,000 Credit Additional Paid-in Capital 12,500
Notice that in our second example in section three, common stock is credited for the stocks' par value of $100, while another equity account, additional paid-in capital, is credited for the excess of the stocks' sales price of $125 over its par value of $100. The sale results in a total increase to shareholders' equity in the amount of $62,500.