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.
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 = Par value per share x number of shares issued
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.
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:
Common Stock $10,000,000
Under the Equity section the common stock will be shown as follows:
Common Stock (1,000,000 shares in issue, $10 per share ) $10,000,000
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