What is common stock?

Definition

Common stock is the equity line that holds the par value of shares the company has issued to owners. On the books, this is an Equity account on the Balance Sheet, not the full cash that came in and not a share of this year's profit.

Par value is a legal face amount printed on the share, often one dollar or even a penny. Anything the investor paid above that face amount is recorded in additional paid-in capital, not here.

Cash-basis and accrual books both keep this line the same way. Issuing shares is a financing event, not a sale on the Income Statement.

This line is ownership at face value, not a pile of cash. A vineyard can show a small common stock balance after a large raise if most of the cash sat above par.

Where it shows up

Balance Sheet: Located in the equity section.

P&L: Related to ownership, not to a period's profit.

Cash flow: Increases in this account, reported cash from financing activities increases.

See also: Additional Paid-In Capital · Equity · Statement Of Changes In Equity

When you look at your Balance Sheet, this line sits in the equity section with additional paid-in capital and retained earnings. The amount is the par value of shares issued and still outstanding.

When the balance is high, more par value has been issued. When it is low, the vineyard has issued few shares, or has a tiny par.

The profit and loss statement does not list this account. Issuing stock is not revenue, and buying it back is not an expense.

The Statement of Changes in Equity shows shares issued during the period as an increase to this line. That ending total has to match the Balance Sheet.

On the Statement of Cash Flows, cash received for new shares is a financing inflow. The cash goes up with the equity, not with sales.

How it works

The balance comes in when shares are issued. Cash, or sometimes another asset, is debited, and this line is credited for the par amount.

Anything above par is credited to additional paid-in capital. The two lines together are the paid-in piece of equity.

This line does not move when the vineyard earns a profit. Profit flows to retained earnings after the close.

It also does not move when the owner takes a dividend. Dividends reduce retained earnings, not the par account.

Treasury stock is the contra account used if the vineyard buys its own shares back. Common stock stays at the original par until those shares are retired.

A no-par issuance may credit the whole amount here, or to a stated-value account that plays the same role. Read the share documents if the face amount is zero.

Authorized shares are a legal ceiling, not a journal. Only issued shares hit this line.

Stay with this account when you read a raise. The cash that arrived is the financing story; this line only keeps the par slice.

Example

A vineyard incorporates and issues 1,000 shares with a $1 par to the founder for $1,000 cash. Assets and this residual both rise by $1,000.

The issuance at par is recorded:

Debit: Cash $1,000

Credit: Common stock $1,000

Cash and this line both go up by $1,000. That credit is ownership, not a tasting-room sale.

Later a neighbor invests $9,000 for 1,000 more shares at the same $1 par. This line rises by another $1,000, and the extra $8,000 is additional paid-in capital.

The Balance Sheet now shows $2,000 here. If it shows $10,000, the bookkeeper parked the whole raise in the par account and skipped the excess line.

Profit from the harvest does not change this $2,000. That result still closes into retained earnings.

Common mix-ups

Common stock is not the cash from the raise. Cash is an asset; this line is only the par slice of what owners paid.

This line is not the market value of the vineyard. Book value is the whole equity section, and a buyer may pay more or less than that.

Common stock is not retained earnings. Retained earnings is kept profit; this line is paid-in capital at par.

Related terms

• Additional Paid-In Capital: Amounts investors paid above par value for their shares.
• Equity: The owners' residual claim on the business after liabilities are subtracted from assets.
• Treasury Stock: Shares the company has bought back and holds itself.
• Statement Of Changes In Equity: A statement reconciling beginning and ending owner equity for the period.
• Owner's Capital Contribution: Money an owner puts into the business.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Book Value: The equity value carried on the balance sheet rather than a market value.
• Retained Earnings: Cumulative profits kept in the business rather than paid out.