Before discussing the accounting for stock, it may be helpful to understand the following stock terms.
Authorized stock. Per the articles of incorporation, the type and number of shares of stock a corporation may sell. Approval by stockholders is required to issue any shares above the authorized level.
Issued stock. The number of shares transferred to stockholders in exchange for cash, assets, or services rendered.
Outstanding stock. Issued stock that is held by stockholders and has not been bought back by the corporation.
Treasury stock. Issued stock that has been bought back by the corporation.
Market value. The price set by interested buyers and sellers for the stock of publicly traded companies.
Par value. The value assigned in a corporation's articles of incorporation to one share of stock. It appears on the stock certificate. In some states, the par value of all outstanding shares is considered the legal capital of a corporation. Legal capital is the amount of contributed capital that must remain in the corporation and may not be paid out in dividends.
Contributed capital. Also called paid‐in capital, it is the amount of value received by the corporation when it issues its stock. It includes the par value and any amount received in excess of the par value.
No‐par value stock. Shares of stock that do not include a par value. The Board of Directors may assign a value to this type of stock.
Stated value. The value assigned to no‐par value stock by the Board of Directors of a corporation.
Common stock. The class of stock issued most frequently by a corporation. Common stock ownership normally includes the rights to vote on stockholder matters, to receive dividends only after preferred stockholders, and, in the event of a liquidation, to receive their investment back if anything remained after the creditors were paid and the investment of the preferred stockholders was returned to them. It may have a par value or be no‐par value stock that may or may not have a stated value.
Preferred stock. Preferred stock is a class of stock that normally has the right to receive dividends, and in the case of liquidation of the corporation, a return of investment before the common stockholders. Preferred stock usually does not include a voting right.
Dividends. A dividend is a distribution by a corporation to its owners in the form of cash, assets, or the company's stock. Stockholders do not have withdrawal accounts like sole proprietors or partners because the only way they can get money from the corporation is if the Board of Directors authorizes a dividend.
Stockholders' equity. In a corporation's balance sheet, the owners' equity section is called stockholders' equity. It includes the contributed capital accounts and retained earnings.
Retained earnings. The amount of net income a corporation has earned since it began in business that has not been distributed as dividends to its stockholders. Net income increases retained earnings. Dividends, net losses, and some treasury stock transactions decrease retained earnings. Net income, and dividends, if they are recorded in a separate account, are transferred to retained earnings during the closing entry process.