Common Stock Definition

Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on stock exchanges from where they can have access to funds from the general public.

What Type Of Account Is Common Stock

Common stock is an equity account and comes under the Equity section of the balance sheet. It has a credit balance and it is recorded at par value of the shares multiplied by the number of shares in issue.

Common Stock Formula

Common stock = Par value per share x number of shares issued

Common Stock Vs Preferred Stock

The difference between common stock and preferred stock is that the preferred stockholders have priority of receiving dividends before distribution of profits among common stockholders.

Common Stock Example

Suppose a company has just gone public and has issued 1,000,000 $10 par shares on the stock exchange. All the issued shares have been subscribed and the application money was credited to company’s bank account.

The following journal entry will be passed:

                Cash                                                                      $10,000,000

                                Common Stock                                                                 $10,000,000

Under the Equity section the common stock will be shown as follows:

Balance Sheet

    Stockholders’ Equity

    Common Stock (1,000,000 shares in issue, $10 per share )                             $10,000,000


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