What is Stock Accounting?

Explanation

  • Stock is of two types. One is the inventories we hold to be traded or utilized for other produced finished goods. The other is shares, also known as stock. This article will discuss various aspects of the second type of stock, i.e., shares.Every business needs funds to operate its business effectively. So to manage such funds, some businesses choose the option of issuing stocks in the open market. They raise funds by allotment of stock against the money received from the investors.After that, the process of recording the transaction of receiving the money from the public and issuing them the stock certificateStock CertificateStock Certificate, also called a Share Certificate, is a legal document evidencing the ownership of stocks in a Company, including details like the stockholder’s name, issuing date, the total number of stocks issued, identification number, and the corporate seal & sign. read more is known as Stock Accounting.

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Types of Stock Accounting

  • The company issues stocks against cash. I.e., the company will receive cash, and the investor will receive a stock certificate.In this option, stocks were issued for consideration other than cash. i.e., issuing stock for taking some services, etc.The last type is issuing stock for purchasing some existing stock issued in the market. In other words, to repurchase the stock issued earlier, new stock is going to be an issue.

Stock Accounting Entries

As discussed above, there are three types of stock for which we have to pass the recording entries, which are as follows:

#1 – Where Stocks are Issued for Cash

In the case where stocks are issued for cash, then to record the transaction following two entries need to be journalized in the books of accounts:

*In a case where the stock is issued at a price higher than the nominal value of a share.

#2 – Where Stocks are Issued for Consideration Other than Cash

In a case where stocks are issued for consideration other than cash, then to record the transaction following two entries need to be journalized in the books of accounts:

#3 – Where Stocks are Issued for Purchasing Our Stock

In a case where stocks are issued for purchasing our stock issued earlier, then to record the transaction following entry needs to be journalized in the books of accounts:

How to Record Stock?

Let us understand the recording of stock with an example, company A wants to issue stock amounting to $100,000 comprising of 10,000 stocks of $10 each on 01.04.2020 and to issue stock certificates to the applicants on 10.04.2020, then record such transaction in the books of accounts following entries are to be passed:

On date 01.04.2020:

Then on date 10.04.2020, to allow the stock applied entry would be:

Benefits

#1 – Helps in decision making of Management

From the information compiled in the stock account, the register management or decision-making team could easily gather the data without making such efforts.

#2 – Helps Management to reconcile and provide data to the lenders as and when required

The Lenders and the management as well need to analyze the financial position of an entity before taking any decision; the proper accounting of stock helps in analyzing the amount which the company has raised by way of stock issuance.

#3 – All Compliances Decisions

The entity earns and declares a dividendDeclares A DividendDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more to the stockholders; then, they must pay some taxes levied thereupon. To analyze such an amount and promptly comply with the regulatory guidelines, one must observe stock records.

#4 – Goodwill/ Capital Reserve

When someone wants to take over the business, then for the valuation of goodwillValuation Of GoodwillGoodwill valuation is the systematic evaluation of the goodwill of the company to be shown in the balance of the company under the head intangible assets and top methods to value include Average Profits Method, Capitalization Method, weighted average profit method and the Super Profits Method.read more or capital reserveCapital ReserveCapital reserve is a reserve that is formed from the company’s profits earned from its non-operating activities during a period of time and is retained for the purpose of financing the company’s long-term projects or writing off its capital expenses in the future.read more, one needs to analyze the stock accounts as the permission of stockholders is required.

Conclusion

Stock Accounting is simply a grouped or compiled form of all the transactions which were transacted over a set period, whether they are economical or not of the stock of the company, which we can easily compare with the records to analyze the funds raised and their utilization for the sake of earning maximum possible benefits thereupon.

This article has guided what stock accounting is and its definition. Here we discuss types, journal entries, how to record stock, and its benefits. You may learn more about financing from the following articles –

  • Floating StockCapital StockStockholderStockholder’s Equity Statement