Common stock in balance sheet

Common stock in balance sheet is a representation of the journal entry of all the common stocks that have been issued by a company. In every financial management setup, it is important that an accurate record of transactions, assets, liabilities, and equity of the company be kept. Items such as the different types of stock (common and preferred) are also recorded on the balance sheet. In this article, we will show how to enter or record issued common stocks on a balance sheet for a company.

Typically, businesses use equity financing as a source to raise money for their business by issuing the company’s common stock. To put it simply, it is the acquisition of funds through the sale of business ownership. A 10% stake, for instance, can be sold for $10,000 if the value of your company is $100,000.

This acquisition of funds through the sales of common stocks will need to be recorded in a balance sheet in order to measure and keep track of the company’s finances. But before we show an example of an entry of common stock in a balance sheet which is usually done in a shareholders equity, let’s define what is shareholders equity.

What is Shareholders Equity?

Shareholders Equity (also known as Stockholders Equity) is a balance-sheet account that consists of share capital plus retained earnings. It also represents the difference between the value of assets and liabilities. Stockholders Equity = Assets – Liabilities can be expressed by rearranging the original accounting equation, Assets = Liabilities + Stockholders Equity.

Now that we have an understanding of what shareholders’ Equity is, we can now show the entry of common stock in a balance sheet in the stockholders’ section of a financial statement.

Balance sheet representation of common stock

The appropriate financial reporting for preferred and common stock is demonstrated in the example below. Assume that 10,000 shares of USD 100 par value, cumulative, convertible preferred stock (five common shares for one preferred share) have been issued and are in circulation, as well as 200,000 shares of USD 10 par value common stock, of which 80,000 have been issued and are in circulation. Assuming retained earnings of USD 450 000, the stockholders’ equity section of the balance sheet is as follows:

Stockholders’ equity:
Paid-in capital:
Preferred stock – USD 100 par value, 6 percent cumulative, convertible (5 common for 1 preferred); authorized, issued, and outstanding, 10,000 shares$1,000,000
Common stock – USD 10 par value; authorized, 200,000 shares; issued and outstanding 80,000 shares800,000
Total paid-in capital$1,800,000
Retained earnings450,000
Total stockholders’ equity2,250,000
Entry of common stock in the balance sheet

Preferred stock is listed before common stock on the balance sheet because the preferred stock is preferred in terms of dividends, assets, or both. The company provides the conversion rate in a footnote or a parenthetical note following the description of preferred stock.

An image showing common stock in balance sheet
Common stock in a balance sheet. Photo credit to MITCHELL FRANKLIN; PATTY GRAYBEAL; AND DIXON COOPER

Examples of common stock in a balance sheet

Accounting / Journal entry for issuance of common stocks

When a company issues stock at PAR, the following journal entry is made. As an illustration, XYZ Co. issues 10,000 shares at $1 each. The accounting system can accept the subsequent journal entry.

Common stock balance sheet entry example

When common stock is issued at PAR, the following journal entry is made.

ParticularsDebitCredit
Cash10,000
Common stock10,000
Balance sheet for common stock issued at PAR

The receipt of cash has a debit impact on the transaction. By issuing securities or reducing ownership stakes, the money was obtained. On the other hand, the transaction’s credit impact is reflected in the equity balance.

Accounting / Journal entry for issuance of common stocks at premium

In the event that the company issues stock at a premium, the following journal entry is recorded in the general ledger. As an illustration, XYZ Co. issues 10,000 shares at a $1 PAR value and a $0.5 premium. The accounting system can be updated with the subsequent journal entry.

Common stock with paid-in capital balance sheet entry example

ParticularsDebitCredit
Cash10,000
Common stock (10,000 x 1)10,000
Paid in capital (10,000 x 0.5)5,000
Common stock with paid-in capital balance sheet entry

The receipt of the cash has a debit impact on the transaction. This amount is received in accordance with the equity issue. On the other hand, capital issued at PAR was the source of the first credit records. The second credit in the aforementioned transaction, in a similar manner, reflects the credit impact of the sum received in excess of the PAR value of the common stock.

Balance sheet entry for service rendered

The company may occasionally issue common stock in exchange for services received or rendered. In this situation, it is necessary to give the service a specific value (Monetary value). As an illustration, the XYZ startup agrees to pay the $30,000 in attorney fees through the issuance of equity. The amount of equity to be issued is $3 per share ($2 is the value of the PAR, and $1 is above the PAR). You can publish the following journal entry.

Balance sheet entry for service rendered

ParticularsDebitCredit
Organization cost30,000
Common stock (2×10,000)
20,000
Additional Paid in the capital (1×10,000)10,000
Balance sheet entry for service rendered

How to calculate common stock in balance sheet

The stockholders’ equity of a hypothetical company will be used to calculate common stock. For example, technical Services, Inc.’s post-year-end balance sheet includes the following stockholders’ equity section (with certain details omitted):

Stockholders? equity:
6% cumulative preferred stock, $100 par value, callable
at $102, 100,000 shares authorized
$2,400,000
Common stock, $2 par value, 2,000,000 shares authorized2,200,000
Additional paid-in capital: Common stock1,485,000
Donated capital410,000
Retained earnings, end of year3,470,000
Total stockholders’ equity$9,965,000
Stockholders’ section of technical services Inc.

From the data, as shown above, calculate the following:

  1. How many shares of common stock are outstanding?
  2. What was the average issuance price per share of common stock?
  3. What is the book value per share of common stock? (Assume there are no dividends in arrears.)
  4. What was the dividend declared during the year on each share of common stock?

Solution to question 1

Recorded Par value of all common stock outstanding$2,200,000
Divided by: Par value per share of common stock$2
Number of shares of common stock outstanding [2,200,000 / $2]1,100,000 shares
The solution to how many shares of common stock are outstanding

Please keep in mind that this company has no treasury stock. Treasury shares would be deducted from total shares only when they exist.

Solution to question 2

Recorded Par value of all common stock outstanding$2,200,000
Plus: Additional paid-in capital: Common stock1,485,000
Total issue price of all common stock$3,685,000
Total issue price of all common stock divided by the number of shares of common stock outstanding1,100,000
Average issue price per share of common stock [$3,685,000 / 1,100,000]$3.35 per share
The solution of the average issuance price per share of common stock

Note: This company has added paid-in capital to its common stock. At least some stockholders paid more than the par value for their shares. Because stock prices fluctuate, this is a common occurrence for most corporations.

Solution to question 3

Total stockholders’ equity$9,965,000
Subtract: Call value of Preferred stock [$102 * 24,000 shares]2,448,000
Total Book Value belonging to common stockholders$7,517,000
Divided by the number of common shares outstanding1,100,000
Book value per share of common stock {$7,517,000 / 1,100,000}. The book value per share of common stock rounded to the nearest
cent
$6.83
The solution for the book value per share of common stock

Please keep in mind that Book Value is a fictitious figure. It simply represents the amount of value due to common stockholders divided by the number of outstanding common shares. The call price of preferred stock is the amount paid to buy out preferred stockholders.

Solution to question 4

Assume that the retained earnings at the start of the year were $750,000, and the net income for the year was $3,600,000.

Retained earnings, at the beginning of the year$745,000
Add: Net income for the year3,600,000
Subtotal4,345,000
Subtract: Retained earnings at end of the year3,470,000
Total dividends paid during the year875,000
Subtract: Dividends on preferred stock144,000
Total dividends due to common stockholders$731,000
Divided by: Number of common shares outstanding1,100,000
Dividends per share of common stock outstanding, rounded$ .6645
The solution to the dividend declared during the year on each share of common stock

Conclusion

Common stock in a balance sheet of a company is recorded in the “stockholders’ equity“. This is where investors can calculate the book value, or net worth, of their shares, which is equal to the assets minus the liabilities of the company. Therefore it is essential that financial managers get this recording process right.

FAQ

What is the issuance of common stock?

It means when a company sells its ownership by the issuing of common stock. In general, common stock is issued at PAR plus a premium. The cash received less than the PAR value is classified as common stock, and the cash received more than the PAR value is classified as additional paid-in capital.

Is common stock an asset on a balance sheet?

No, common stock is neither an asset nor a liability; it is a type of equity.

How do you add common stock to the balance sheet?

When a common stock has a stated or par value, multiply the number of shares outstanding by the stated or par value per share. This amount is recorded as common stock on a balance sheet in the shareholder’s equity section.

Is common stock in income statement or balance sheet?

Both the income statement and the balance sheet include common stock.

A video of common stock in a balance sheet.
Last Updated on September 12, 2022 by Nansel Nanzip Bongdap