When a company issues common stock, the accounting treatment involves a debit and a credit entry in the company’s books. Specifically, common stock is credited when the stock is sold or issued, reflecting the increase in equity.
Here’s how it works:
- Issuance of Common Stock: When a company sells common stock to investors, it receives cash or other assets. In this scenario, the company will:
- Debit (increase) Cash or another asset account for the amount received.
- Credit (increase) Common Stock for the par value of the stock issued.
- Example: If a company issues 1,000 shares of common stock with a par value of $1 for $10,000, the entries will be:
- Debit Cash $10,000
- Credit Common Stock $1,000 (1,000 shares x $1 par value)
- Credit Additional Paid-In Capital $9,000 (the excess over par value: $10,000 – $1,000)
- When Common Stock is Purchased Back: If a company buys back its common stock (treasury stock), the journal entries are:
- Debit Treasury Stock for the purchase price.
- Credit Cash (or other assets) for the same amount.
In summary, common stock is credited during its issuance, signifying an increase in equity, while it is debited when it is repurchased by the company. This basic accounting principle ensures that the company’s balance sheet accurately reflects its equity structure.