Ever glanced at a balance sheet and felt like you were trying to read hieroglyphics? Trust me, you’re not alone. Financial statements can seem as thrilling as watching grass grow—but they don’t have to be! Think of the balance sheet as a company’s financial selfie, capturing its assets, liabilities, and equity in one snapshot. And smack dab in the middle of that selfie is common stock. Intrigued yet? Stick around, because we’re about to demystify how to record common stock on a balance sheet, all without putting you to sleep.
In every financial management setup, keeping an accurate record of transactions, assets, liabilities, and equity isn’t just good practice—it’s essential. Items like the different types of stock (yes, there’s more than one kind!) are also recorded on the balance sheet. In this article, we’ll show you how to enter or record issued common stocks on a company’s balance sheet.
What Is Common Stock in a Balance Sheet?
So, what’s the deal with common stock on the balance sheet? In plain English, common stock represents the shares that a company has issued to raise money—it’s like selling tiny pieces of your business to investors. These shares are recorded in the Shareholders’ Equity section of the balance sheet. Think of it as the company’s way of saying, “Here’s who owns which slice of our pie.”
This representation isn’t just for show—it makes it easier for shareholders to know their dividends and stake in the company. After all, who doesn’t like knowing how big their slice of the pie is?
Typically, businesses use equity financing to raise money by issuing common stock. To put it simply, it’s the acquisition of funds through the sale of business ownership. For example, if your company is worth $100,000, you could sell a 10% stake for $10,000. Cha-ching!
This influx of cash from selling common stock needs to be recorded on the balance sheet to keep track of the company’s finances. But before we dive into how that’s done, let’s take a quick detour to define something important: shareholders’ equity.
What Is Shareholders’ Equity?
Glad you asked! Shareholders’ Equity (also known as Stockholders’ Equity) is like the grand total of what the company’s worth to its owners after paying off all its debts. It’s a balance sheet account that consists of share capital plus retained earnings. Mathematically, it’s calculated as:
Shareholders’ Equity = Assets – Liabilities
Remember the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity. Rearranged, it shows that shareholders’ equity is what’s left when you subtract what the company owes from what it owns. Think of it as the company’s net worth or, as I like to call it, the “leftover pizza” after everyone’s had their share.
Now that we’ve got that sorted, let’s get down to business and see how common stock fits into this equation on the balance sheet.
Balance Sheet Representation of Common Stock
Alright, time to crunch some numbers—but we’ll keep it painless, promise. Let’s walk through an example to see how common stock shows up on the balance sheet alongside preferred stock.
Imagine Company XYZ has issued:
- Preferred Stock: 10,000 shares at a $100 par value, 6% cumulative, convertible at a rate of five common shares for one preferred share (fancy, right?). All of these shares are authorized, issued, and outstanding. Do the math, and that’s $1,000,000 in preferred stock.
- Common Stock: Authorized to issue 200,000 shares at a $10 par value. So far, they’ve issued and have outstanding 80,000 shares, totaling $800,000.
Add to that retained earnings of $450,000, and here’s how the Stockholders’ Equity section of the balance sheet would look:
Stockholders’ Equity:
| Account | Amount |
|---|---|
| Paid-in Capital: | |
| Preferred stock – $100 par value, 6% cumulative, convertible (5 common for 1 preferred); authorized, issued, and outstanding, 10,000 shares | $1,000,000 |
| Common stock – $10 par value; authorized, 200,000 shares; issued and outstanding, 80,000 shares | $800,000 |
| Total Paid-in Capital | $1,800,000 |
| Retained Earnings | $450,000 |
| Total Stockholders’ Equity | $2,250,000 |
Notice how preferred stock is listed before common stock? That’s not just because we’re polite; it’s because preferred stockholders have—you guessed it—preference when it comes to dividends and assets. They’re like the VIPs in the shareholder world.
The company often provides the conversion rate (in this case, five common shares for one preferred share) in a footnote or parenthetical note following the description of preferred stock. It’s like the fine print in a contract, but way less boring. Okay, maybe equally boring, but still important!
Examples of Common Stock on the Balance Sheet
Accounting for Issuance of Common Stock at Par Value
Ready to get your accounting hat on? Let’s see how issuing common stock works in the real (financial) world.
First up, when a company issues stock at par value (that’s the face value of the stock, not how much it thinks it’s worth after a confidence boost), here’s how the journal entry would look.
Imagine XYZ Co. decides to issue 10,000 shares at $1 each. The accounting system would record the following:
| Particulars | Debit | Credit |
|---|---|---|
| Cash | $10,000 | |
| Common Stock | $10,000 |
The company debits (increases) cash because money is flowing in—always a good thing. It credits (increases) common stock equity, recording the ownership stakes it has issued. Voilà! You’ve just balanced your books.
Accounting for Issuance of Common Stock at a Premium
But what if your company’s stocks are hotter than a viral TikTok dance, and you can sell them above par value? That’s issuing stock at a premium. Let’s see how that works.
Suppose XYZ Co. issues 10,000 shares with a par value of $1, but investors are willing to pay $1.50 per share (because you’re just that awesome). The extra $0.50 per share is the premium.
The journal entry would be:
| Particulars | Debit | Credit |
|---|---|---|
| Cash | $15,000 | |
| Common Stock (10,000 x $1) | $10,000 | |
| Paid-in Capital in Excess of Par (10,000 x $0.50) | $5,000 |
You see, the cash account is debited $15,000 (10,000 shares x $1.50). The common stock account is credited $10,000 (10,000 shares x $1 par value), and the extra $5,000 goes into “Paid-in Capital in Excess of Par”—think of it as a tip jar for how much investors love you.
Issuing Common Stock for Services Rendered
Sometimes, a company might issue common stock in exchange for services received. It’s like bartering, but with more paperwork. In this case, you have to assign a monetary value to the services rendered.
For example, suppose XYZ Co. agrees to pay $30,000 in legal fees by issuing equity. The stock has a par value of $2 per share with an additional $1 above par. Here’s the journal entry:
| Particulars | Debit | Credit |
|---|---|---|
| Organization Cost (Legal Fees) | $30,000 | |
| Common Stock (10,000 x $2) | $20,000 | |
| Additional Paid-in Capital (10,000 x $1) | $10,000 |
Here, the company debits the organization cost to reflect the expense and credits common stock and additional paid-in capital to reflect the issuance of shares. It’s a win-win: the company gets legal services, and the lawyer gets a piece of the action.
How to Calculate Common Stock in the Balance Sheet
Time to put on your detective hat! Let’s calculate common stock from a hypothetical company’s stockholders’ equity section. Here’s the data from Technical Services, Inc.:
| Stockholders’ Equity | Amount |
|---|---|
| 6% cumulative preferred stock, $100 par value, callable at $102, 100,000 shares authorized | $2,400,000 |
| Common stock, $2 par value, 2,000,000 shares authorized | $2,200,000 |
| Additional paid-in capital: Common stock | $1,485,000 |
| Donated capital | $410,000 |
| Retained earnings, end of year | $3,470,000 |
| Total stockholders’ equity | $9,965,000 |
Let’s tackle some questions:
- How many shares of common stock are outstanding?
- What was the average issuance price per share of common stock?
- What is the book value per share of common stock? (Assume there are no dividends in arrears.)
- What was the dividend declared during the year on each share of common stock?
Solution 1
Number of shares of common stock outstanding:
Recorded par value of all common stock outstanding: $2,200,000
Par value per share of common stock: $2
Number of shares = $2,200,000 / $2 = 1,100,000 shares
So, there are 1,100,000 shares of common stock outstanding. Easy peasy.
Solution 2
Average issuance price per share of common stock:
Total amount from common stock: $2,200,000
Additional paid-in capital: $1,485,000
Total amount raised = $2,200,000 + $1,485,000 = $3,685,000
Average price per share = $3,685,000 / 1,100,000 shares = $3.35 per share
So, investors paid an average of $3.35 per share for the common stock. Not too shabby!
Solution 3
Book value per share of common stock:
Total stockholders’ equity: $9,965,000
Subtract call value of preferred stock: 24,000 shares x $102 = $2,448,000
Total equity belonging to common stockholders: $9,965,000 – $2,448,000 = $7,517,000
Book value per share = $7,517,000 / 1,100,000 shares = $6.83 per share
So, the book value per share of common stock is $6.83. Think of it as the accounting world’s way of saying, “Here’s what each share is worth on paper.”
Solution 4
Dividend declared during the year on each share of common stock:
Assuming retained earnings at the beginning of the year were $745,000, and net income for the year was $3,600,000.
Retained earnings, beginning of year: $745,000
Add net income: $3,600,000
Subtotal: $4,345,000
Subtract retained earnings at end of year: $3,470,000
Total dividends paid during the year: $4,345,000 – $3,470,000 = $875,000
Subtract dividends on preferred stock: 24,000 shares x $6 (6% of $100 par value) = $144,000
Total dividends to common stockholders: $875,000 – $144,000 = $731,000
Dividend per share = $731,000 / 1,100,000 shares = $0.6645 per share
So, each common stockholder received approximately $0.66 per share in dividends. Time to treat yourself to… half a cup of coffee?
Takeaways
- Common stock represents ownership in a company and is recorded in the Shareholders’ Equity section of the balance sheet.
- Issuing common stock is a way for companies to raise funds through equity financing.
- Shareholders’ Equity is calculated as Assets minus Liabilities and represents the company’s net worth.
- Common stock can be issued at par value or at a premium, and the accounting entries will reflect this.
- Understanding how common stock is represented on the balance sheet helps investors gauge a company’s financial health and their own stake in the company.
- Calculating figures like the number of shares outstanding, average issuance price, book value per share, and dividends per share provides valuable insights for both the company and investors.
And there you have it! Common stock on the balance sheet doesn’t have to be a mystery fit only for financial wizards. With a little bit of knowledge (and maybe a dash of humor), you can navigate these waters like a pro. So the next time you peek at a balance sheet, you might just crack a smile instead of breaking into a cold sweat.