When a company issues common stock for cash, the correct effect on the accounting equation is that assets increase and stockholders’ equity increases.
This occurs because the company receives cash (an asset) in exchange for the company’s stock. The cash received boosts the total assets on the balance sheet. At the same time, the issuance of common stock increases the stockholders’ equity, as it represents the owners’ claim on the company. Therefore, the accounting equation – which states that Assets = Liabilities + Stockholders’ Equity – will still hold true after the transaction.