All corporations are authorized to issue stock to investors, whether the corporation is publicly traded or not. A stockholder is generally assigned a percentage of ownership in the company, based on the percentage of stock he owns. There is a difference between the number of shares a company is authorized to issue and the number of shares actually issued. When you issue stock to shareholders, you must adjust two accounts on your balance sheet to record the transaction.
Authorized Vs. Issued Stock
The amount of stock you issue differs from the amount of stock your company is authorized to issue. When you establish a corporation, the number of shares your business is authorized to issue is listed on your Articles of Incorporation filed with the state where you transact business. When shares are actually issued, the remaining number of shares your company is authorized to issue decreases. Authorized shares may be reported on the balance sheet. However, reporting the authorized, but unissued, shares of stock serves more as a tool for keeping track of the number shares that can still be issued. Authorized shares have no monetary value until they're sold.
Many states require companies to list the par value, or stated value, of each share of stock the company is authorized to issue. Values are generally set when you establish a corporation. Although you set a per-share value, you may actually receive more than the par value when you issue stock to shareholders. When this occurs, you receive capital in excess of par value and must reflect the additional capital on your balance sheet accordingly.
The first balance sheet account affected by issuing stock is the cash account. The cash account increases by the amount your company receives for the purchased stock. If you receive capital in excess of par value, you must create two cash account entries to allocate the money received for each category. For example, if you issue a share of stock for $20 that has a par value of $1, make one entry labeled “Common Stock, Par-Value -$1” and a second entry labeled “Capital in Excess of Par-Value - $19” to your balance sheet cash account. The effect of the entries increases your account by $20 and the allocation of funds is recorded.
Stockholder's Equity Account
The effect on the Stockholder’s Equity account from the issuance of shares is also an increase. Money you receive from issuing stock increases the equity of the company’s stockholders. You must make entries similar to the cash account entries to the Stockholder’s Equity account on your balance sheet. Using the figures from the example above, the first entry is labeled “Common Stock – Par Value $1.” Enter the number of shares you issued with the transaction and the number of shares your company is still authorized to issue. These figures must reflect the decrease in the number of authorized shares. The par value collected from the issued stock must be recorded on the right side of the balance sheet. Next, create an entry that reads “Paid-in Capital in Excess of Par Value.” Record the excess capital you received on the right side of the balance sheet. Label a third balance sheet entry “Total Paid-in Capital” and list the sum of your two previous entries. The result equals the total amount you receive from the stock issuance, and the total increase to the Stockholder’s Equity account.