As mentioned, this account will only hold the par value for the shares issued by the company. For companies, the process of separating the amount is crucial in determining the amount for this account. Even when companies don’t receive compensation, they must credit the par value to this account.

Journal entry for issuing common stock

If there is no balance in the Additional Paid-in Capital from Treasury Stock account, the entire debit will reduce retained earnings. Any finance received in excess of the share’s par value ends up on the share premium account. If companies issue shares at below the par value, this account will also get impacted.

This includes the issuance at par value, at no par value, at a stated value, and the issuance for non-cash assets. Selling common shares to investors is a common method for companies to raise capital. This capital is used by the company to fund operations, invest in assets, and pay salaries. When a company issues common shares, it is selling ownership in the company to investors in exchange for cash. These investors then become shareholders, and their ownership stake in the company is based on the percentage of shares they hold. Issuing share capital allows companies to raise the funds they need to grow and develop.

1. Dividends are not paid on treasury shares, they provide no voting rights, and they do not receive a share of assets upon liquidation of the company.
2. In some states, the entire amount received for shares without par or stated value is the amount of legal capital.
3. Authorized share is the number of shares state in the company incorporation of the article.
4. When a company issues common shares, it is effectively selling ownership stakes in the company to the investors who purchase the shares.

Journal entry for the issuance of common shares without par value

However, the accounting for the issuance of common stock doesn’t involve two entries, like most other transactions. It also impacts another financial account, which is the share premium account. As mentioned, this account records any exchange invoice template amount received above the par value. The amount in this account will include the difference between the funds received and the par value.

Capitalization of Retained Earnings to Paid-Up Capital

Assume Duratech’s net income for the first year was $3,100,000, and that the company has 12,500 shares of common stock issued. During May, the company’s board of directors authorizes the repurchase of 800 shares of the company’s own common stock as treasury stock. Each share of the company’s common stock is selling for $25 on the open market on May 1, the date that Duratech purchases the stock. Duratech will pay the market price of the stock at $25 per share times the 800 shares it purchased, for a total cost of $20,000. The following journal entry is recorded for the purchase of the treasury stock under the cost method.

When the share has no par value, all the issuance prices will be recorded into the common stock. For example, the company ABC issues 20,000 shares of common stock at par value for cash. As mentioned, we may issue the common stock in exchange for the non-cash asset, such as land, building or equipment, etc. instead of the cash asset.

As mentioned, nowadays, par value has nothing to do with the market value of the common stock and it is just a number on the paper. Likewise, investors typically do not deem that the par value of the common stock is necessary to exist before they purchase rochester accounting services the stock for their investments. At the time of the formation of the corporation, the market value of our common stock cannot be determined yet. Though, the par value of the common stock is registered as $1 per share on the stock certificate.

Accounting for Common Stock

In this journal entry, we can debit the additional paid-in capital account only if there is an available balance (the credit side). However, if there is no available balance in the additional paid-in capital account, we will need to debit the retained earnings account instead. It is useful to note that in many jurisdictions, issuing the common stock below par value is not allowed and is considered illegal. Additionally, even though some jurisdictions allow the issuance of the common stock below its par value, such activity is usually very rare. In this case, we will record the land in the balance sheet as $50,000 ($10,000 x 5,000 shares) even though the land was put on sale for a different price (e.i. $60,000).

Authorized Share

When stock is sold to investors, it is very rarely sold at par value. Stock with no par value that has been assigned a stated value is treated very similarly to stock with a par value. It is useful to note that when the corporation has more than one type of stock, the additional paid-in capital account above should be broken down to identify which type of stock it belongs to.

The Cash Account is increased by the selling price, $28 per share times the number of shares resold, 100, for a total debit to Cash of $2,800. The Treasury Stock account decreases by the cost of the 100 shares sold, 100 × $25 per share, for a total credit of $2,500, just as it did in the sale at cost. The difference is recorded as a credit of $300 to Additional Paid-in Capital from Treasury Stock. Shares with a par value of  $5 have traded (sold) in the market for more than $600, and many  $100 par value preferred stocks have traded for considerably less than par.

The company needs to record the assets value, common stock, and additional paid-in capital, which is the same as the stock issue for cash. However, the transaction amount depends on assets market value or common stock market value whichever can be measured more reliability. Different from issuance for cash, the issue of stock for non-cash requires the company to define the market value of both stock and noncash assets.

For example, a cash receipt of $8 per share for common stock of $10 par value. This is due to a lack of interest from investors and there is only one investor is willing to pay $8 per share for 1,000 shares. The deficit of $2 per share ($8 minus $10) is called a discount on common stock. Treasury stock transactions have no effect on the number of shares authorized or issued.

The only difference is the replacement of cash with non-cash assets. To illustrate this, let’s assume that ABC Corporation issues1,000 shares of no par value common stock at $50 stated value for $60 cash per share. A stock buyback or share buyback is the process that company decides to purchase its own stock from the capital market. The company may want to increase the share price by increase the demand by buying them back. The share buyback will retain in the company for a future issues, employee compensation, or retirement. No par value stock is the share that issue to the market without stating its par value on the certificate.