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.
What is common stock in balance sheet?
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?
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 shares | 800,000 | |
| Total paid-in capital | $1,800,000 | |
| Retained earnings | 450,000 | |
| Total stockholders’ equity | 2,250,000 |
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.
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.
| Particulars | Debit | Credit |
| Cash | 10,000 | |
| Common stock | 10,000 |
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
| Particulars | Debit | Credit |
| Cash | 10,000 | |
| Common stock (10,000 x 1) | 10,000 | |
| Paid in capital (10,000 x 0.5) | 5,000 |
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
| Particulars | Debit | Credit |
| Organization cost | 30,000 | |
| Common stock (2×10,000) | 20,000 | |
| Additional Paid in the capital (1×10,000) | 10,000 |
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 authorized | 2,200,000 |
| Additional paid-in capital: Common stock | 1,485,000 |
| Donated capital | 410,000 |
| Retained earnings, end of year | 3,470,000 |
| Total stockholders’ equity | $9,965,000 |
From the data, as shown above, calculate the following:
- How many shares of common stock are outstanding?
- What was the average issuance price per share of common stock?
- What is the book value per share of common stock? (Assume there are no dividends in arrears.)
- 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 |
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 stock | 1,485,000 |
| 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 outstanding | 1,100,000 |
| Average issue price per share of common stock [$3,685,000 / 1,100,000] | $3.35 per share |
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 outstanding | 1,100,000 |
| 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 |
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 year | 3,600,000 |
| Subtotal | 4,345,000 |
| Subtract: Retained earnings at end of the year | 3,470,000 |
| Total dividends paid during the year | 875,000 |
| Subtract: Dividends on preferred stock | 144,000 |
| Total dividends due to common stockholders | $731,000 |
| Divided by: Number of common shares outstanding | 1,100,000 |
| Dividends per share of common stock outstanding, rounded | $ .6645 |
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.
