Okay, a couple things we need to dissect here...
What's par value?
Scenario: You run a lemonade stand, and it has become more-and-more successful. People have been wanting to buy ownership in the company, so you decide to sell 100 shares of $1 par value common stock at $10 per share.
Par value can be a little difficult to understand... but in essence:
Par value is the legal dollar amount associated with each unit of stock.
Therefore, legally speaking, by issuing 100 shares at $1 par value...
Scenario: You run a lemonade stand, and it has become more-and-more successful. People have been wanting to buy ownership in the company, so you decide to sell 100 shares of $1 par value common stock at $10 per share.
...we're only creating 100 shares x $1 par value = $100 in Common Stock.
We can record this by crediting Common Stock (an equity account with a normal credit balance), as we're increasing our common stock available.
What do we do with the rest of the $10 per share?
Put simply...
The rest of the share price (minus par value) goes into the Additional Paid-In Capital account.
So in the case of our situation, the par value is $1, but we're selling each share for $10...
Scenario: You run a lemonade stand, and it has become more-and-more successful. People have been wanting to buy ownership in the company, so you decide to sell 100 shares of $1 par value common stock at $10 per share.
...therefore, we are taking on ($10 - $1) x 100 shares = $900 in Additional Paid-In Capital!
Additional Paid-In Capital is an equity account (having a normal credit balance), therefore to increase it we must credit it by $900!
Collecting the cash
Remember, when a company issues shares of stock, they're essentially selling off equity in their company. And... they get paid in cash for that sale!
How much cash will we be collecting in this situation?
Well, there's 100 shares, and each are sold at $10...
Scenario: You run a lemonade stand, and it has become more-and-more successful. People have been wanting to buy ownership in the company, so you decide to sell 100 shares of $1 par value common stock at $10 per share.
...therefore, in total, we're collecting 100 shares x $10 = $1,000 in cash!
To record this increase in Cash, we're going to debit the account (since assets have a normal debit balance)!
This serves as our final journal entry for our issuance of shares!
PAID CONTENT