Companies can raise money without taking on debt by selling new shares of common stock. Although the stock sale improves a company’s cash situation, the transactions do not affect the income statement or the profit and loss statement. Whether you use an accounting software program or a manual accounting system, the stock sale is recorded in the asset and stockholder’s equity portions of the company balance sheet.
Calculate the total cash generated by the stock sale by multiplying the number of shares times the selling price per share. Determine the issue costs by adding up the fees paid to the investment banks for underwriting the stock issue, the legal fees and costs and any extraordinary accounting fees. Subtract the total issue costs from the total cash amount to get the net cash figure.Step 2
Enter the net cash amount using the following as an example. A company issues 5 million new common stock shares at $3 a share for a total of $15 million. The company spends $3 million for issue costs. The net cash would be computed as $15 million minus $3 million to get the net figure of $12 million. Go to the balance sheet asset section and record the $12 million as a cash entry in the debit column.Step 3
Determine the amounts to enter for the common stock and paid-in capital accounts. Using a par value of $1 a share, calculate the total par value by taking the 5 million shares issued multiplied by $1 for a total par value of $5 million. The common stock will be recorded at the par value, or $5 million. The paid-in capital in excess of par is the difference between the net cash of $12 million and the par value of $5 million, or $7 million.Step 4
Go to the shareholder’s equity portion of the balance sheet. Start by entering the common stock amount of $5 million as a credit entry. Now enter the paid-in capital in excess of par of $7 million as a credit entry. The completed entry should be in balance -- the total amount entered in the debit column should equal the total amount entered in the credit column.
- Stock can be issued non-par and with a stated value. Make sure your equity entries reflect the type of stock issued.
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