Issued Common Stock for Cash Journal Entry
Issued common stock for cash is the process that company sells its ownership to the investor in exchange for cash to support the operation.
Capital is the money that a business uses to support its operations and growth. In some cases, capital also refers to human resources, Machinery, building, and land. However, cash is the most important capital for companies. There are two main sources of capital that the company can use to raise more cash to support operations.
First, the company issues share capital to the market. The company will sell part of the company to the investors. Investors will become the owners of the company and they will receive dividends when company makes a profit. Second, the company issue debt security to the market. It means the company borrows cash from investors. Company has obligation to pay back the principal and interest based on the term.
This is often done by selling stocks or bonds, which represent an ownership stake in the company. The company can sell equity stock to the public by listing it on the capital market. It will allow them to issue and trade stock to the public. When the company performs well, it will be able to raise more funds by issuing more stock.
Most of the company will raise stock for the cash which is easy to manage, invest and use in the operation. The transaction will increase the cash balance base on the sale proceed. At the same time, it will increase the equity components which include common shares and additional paid-in capital.
There are a few things which you should be known related to common share. First, selling price is the amount that investors have to pay to receive the share. Second, the par value is the value stated on the share certificate. This value is usually set at a minimum, allowing the company to manage and issue new share in the future.
Journal Entry for Issued of Common Stock for Cash
When the company issues the common stock to the investors, an accountant has to record equity on the balance sheet. The equity components will be separated into two parts which are the common stock and additional paid-in capital.
The other side of the transaction is the cash as the company issues stock for cash.
The journal entry is debiting cash and credit common stock, additional paid-in capital.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Common Stock | 000 | |
| Additional Paid-In Capital | 000 |
The cash record will depend on the amount that company sells the stock. The common stock amount is the par value stated on the stock. The additional paid-in capital is the additional amount that investors paid over the stock par value.
Example
Company ABC issues 1,000 shares of common stock for the cash. With a par value of $ 1, the common stock is issued for $ 100 per share. Please prepare the journal entry of the common stock issue for cash.
The company issues common stock for cash and the issue amount is more than the par value. So we have to calculate the total par value and additional paid-in capital.
Total par value = 1,000 shares x $ 1 par value = $ 1,000
This total par value will be recorded as the common stock under the equity section.
Additional paid-in capital = (1,000 shares * $ 100) – $ 1,000 = $ 99,000
This is another equity component which need to record on the balance sheet.
The journal entry is debiting cash $ 100,000 and credit common stock $ 1,000, additional paid-in capital $ 99,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Common Stock | 1,000 | |
| Additional Paid-In Capital | 99,000 |
The journal entry will increase cash by $ 100,000 as the investors invest in the company. It also increases the common stock by $ 1,000 which is the total par value of all issuance stock. Another component is the additional paid-in capital of $ 99,000.