Journal Entry for Issue of Shares
Shares issues are the process by which the company sells its ownership to the investors in exchange for capital.
Company requires the capital to invest in the daily operation and expansion. The return from company operation may not be enough to support the growth. There are many ways in which owners can use them to raise capital. It includes loans from banks or creditors, issuing bonds, issuing share capital, and so on.
Issue share capital is one of the most popular ways that company can raise funds by selling part of company to the investors. The current investors will transfer some part of ownership to the new investors in order to receive money to support the operation. New investors will spend cash to become the owner of the company based on the percentage of share purchases. They will be able to receive the dividend when the company makes a profit and based on the board approval.
The company will be able to receive money to support operations and expand its business. The common shares are highly likely to issue for more than the par value. The selling price of share capital is the amount of cash that the investors are willing to pay for the share. Par value is the share value stated on the physical share certificate. It is the value that presents in the company article of incorporation.
The difference between share price and par value will be recorded as the additional paid-in capital. It is the equity component that presents on the balance sheet.
Journal Entry for Issue of Shares
When the company issues common shares to the investors, they will receive cash in exchange. The company will receive cash and record it on the balance sheet. The other side of the transaction will impact the equity section. It is separated into the common share capital and additional paid-in capital. The commons share capital will equal the total par value of the share issue while the balancing will be recorded as additional paid-in capital. The journal entry is debiting cash received and credit commons share capital, additional paid-in capital.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Commons share capital | $$$ | |
| Additional paid-in capital | $$$ |
The transaction will increase the cash on the balance sheet and share capital.
Example
Company ABC issues 1,000 common shares to the capital market. The share has a par value of $1 but they are sold for $ 100 per share. The company receives cash at bank of $ 100,000 in exchange for the share issue. Please prepare a journal entry for the share issue.
ABC has issued share capital for cash at bank and the price is higher than the par value. The company has to record new share capital and the additional paid-in capital. The journal entry is debiting cash at bank of $ 100,000 and credit common share capital $ 1,000, additional paid-in capital $ 99,000 on the balance sheet.
| Account | Debit | Credit |
|---|---|---|
| Cash at bank | 100,000 | |
| Commons share capital | 1,000 | |
| Additional paid-in capital | 99,000 |
The transaction will increase cash at the bank as the cash received. The credit side will impact the company’s equity which separates into the common share and additional paid-in capital.
