Common Stock Account

The Common Stock account is the stockholders' equity account in a corporation's general ledger that records the par value, or stated value, of the common stock it has issued. Any amount received above par is recorded separately, usually in an account called Paid-in Capital in Excess of Par or additional paid-in capital. Together the two accounts show the capital that shareholders have contributed for common shares.

The account is a legal and accounting record rather than a measure of what the shares are worth. Its balance is calculated as the number of shares issued multiplied by par value, which for most US companies is a nominal amount such as $0.01 or $1 per share. It is a permanent account with a normal credit balance, and it changes only when shares are issued, retired or reclassified, or when par value changes.

When people buy newly issued shares from a company, the company records the money in two pieces. A small fixed amount per share, set in the company's charter, goes into the Common Stock account. Everything else paid goes into a second account for the extra.

So if a company sells a share for $25 and its par value is $1, the Common Stock account goes up by $1 and the other account by $24. The split is mostly a legal formality; investors usually look at both together.

A corporation issues 100,000 shares of $1 par common stock for $25 per share. It receives $2,500,000 and records:

• Debit Cash $2,500,000.
• Credit Common Stock $100,000 (100,000 × $1).
• Credit Paid-in Capital in Excess of Par – Common $2,400,000.

For no-par stock with a stated value, the stated value is credited to Common Stock and the excess to paid-in capital. For true no-par stock with no stated value, the entire proceeds are credited to Common Stock. When shares are issued for property or services rather than cash, the entry uses the fair value of the shares or of what is received, whichever is more clearly determinable.

• Stock dividends. When a stock dividend is declared, Common Stock Dividend Distributable is credited for the par value of the shares to be issued; on distribution, it is transferred into the Common Stock account.
• Stock splits. A stock split changes the number of shares and the par value per share but leaves the Common Stock balance unchanged.
• Treasury stock. Buying back shares does not reduce the Common Stock account under the cost method; the cost is recorded in a separate contra equity account, treasury stock, because the shares remain issued.
• Retirement. If repurchased shares are formally retired, their par value is removed from Common Stock, with the rest of the cost charged to paid-in capital and retained earnings.

The Common Stock account appears in the stockholders' equity section, typically after preferred stock and before additional paid-in capital, retained earnings, accumulated other comprehensive income and treasury stock. The line usually discloses par value and the numbers of shares authorized, issued and outstanding, for example "Common stock, $0.01 par value; 200,000,000 shares authorized; 52,000,000 shares issued; 50,500,000 outstanding: $520,000". The statement of stockholders' equity shows changes in the account during the year.

Par value originally set a legal minimum capital that a corporation had to keep for creditors, and some state laws still restrict dividends that would impair stated capital. Shares sold below par could leave shareholders liable for the shortfall, which is one reason modern par values are tiny. For analysis, the split between Common Stock and paid-in capital carries little economic meaning; analysts focus on total contributed capital, total equity and book value per share. The account's balance does, however, provide a quick check on the number of shares issued, since dividing it by par value gives the share count. The authorized number of shares sets the ceiling on how far the account can grow without a charter amendment, a limit explained under authorized number of shares of stock.

• Financial Accounting Standards Board
• US Securities and Exchange Commission