Accounting Question
Stocks:
Stocks are shares in ownership of the companies. It represents the capital raised by a corporation by issuing shares. Stock is evidence of ownership interest and not a loan. There are main two types of stocks.
1. Common Stock:
Common stocks are ordinary shares. Common Stockholders are the owners of the corporation and they enjoy voting rights in meetings.
2. Preferred Stock:
Preferred Stock is one kind of ownership that has preferences on the claims of assets and dividends over the common stockholders.
Issuance of Stock:
When a company needs capital it issues shares of stock. Generally., this issuance would be in exchange for cash but it may exchange its stock for non-cash assets like Plant, Property, and Equipment. Some companies issue different classes of stocks and thus are said to have a multiple capital structure, which is generally differed by voting privileges.
1. Par Value is the value assigned to a share of stock when it is authorized and is much less than it is expected market value. The par value is printed on each stock certificate.
2. Stated Value is the value where a stock will not have a par value but will have a state value in the corporation's stated records set by the board of directors of the corporation.
When the stocks are issued above the par value, then the additional amount received is accounted against the Additional paid-in capital.
Treasury Stock:
A company may choose to buy back its own issued and outstanding shares from the market. Management may permanently retire these shares or choose to hold them for resale at future date. The stock held by the company due to its buyback is treasury stock. Treasury stock is the difference between issued stock and outstanding stocks.
Accounting Treatment:
Treasury Stock A/c Dr. Amount
Cash A/c Cr. Amount
When these treasury stocks are sold, then they are accounted for using either of the two methods.
a. Cost Method
b. Equity Method
a. Par Value Method:
The cost method does not consider the par value of the stock, it debits the treasury stock with the total amount received. On resale of the treasury stock, it considers the amount by which treasury stock was purchased and not par value, and any difference in amount is charged to additional paid-in-capital or retained earnings.
Dividend:
The dividend is the sum of the amount paid by the company to its stockholders, out of the profit. In other words, the dividend is the distribution of profit and it may be paid in cash or stock. In simple words, it is the return to the shareholders for their investment in the company. The dividend is given to all types of stockholders, both common stockholders or preferred stockholders.
Cash Dividend: Cash Dividend is the cash paid stockholders out of the profits as a dividend.
Accounting Treatment:
a. Dividends Declared:
Dividend A/c Dr. Amount
Dividend Payable A/c Cr. Amount
b. Payment of Dividend:
Dividend Payable A/c Dr. Amount
Cash A/c Cr. Amount
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