Accounting for the Sale of Stock
Often times companies offer their stock for sale as a way to generate cash. How the stock sale is accounted for depends on the type of stock sold. Most stock sales involve common stock or preferred stock.
Sale of Stock.
Often times companies offer their stock for sale as a way to generate cash. How the stock sale is accounted for depends on the type of stock sold. Most stock sales involve common stock or preferred stock.
Common Stock-sold at par value
Debit cash
Credit common stock
If the common stock is sold above par value the journal entry is slightly different.
Debit cash
Credit common stock
Credit additonal paid in capital (to account for the difference between par value and sell value)
Preferred Stock
The sale of preferred stock is similarly treated, but a separate accounts should be established to record preferred stock and any additional paid in capital for preferred stock sold at above par value.
Journal entry
Debit cash
Credit preferred stock
Credit additional paid in capital preferred stock (if needed)
Treasury stock
Treasury stock is issued stock that the company has bought back from its shareholders. Since a corporation can't be its own shareholder, the "bought back" stocks are not considered assets of the corporation. Treasury stock also doesn't have the right to vote, receive dividends or receive liquidation value.
If the company plans to re issue the shares in the future, it would hold them in treasury and report the reduction in stockholder's equity on the balance sheet.
There are several reasons a company may purchase treasury stock, it may need it for employee compensation plans, to buy another company or to reduce the number of outstanding shares.
Journal entry
Debit treasury stock
Credit cash
When treasury stock is sold the accounts used to record the transaction will vary depending on whether the stock sold above or below the cost of purchase.
Sold above purchase cost
Debt cash
Credit treasury stock
Credit additional paid in capital (the difference between sale price and purchase price)