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- Accounting Basics
- What are Accounting Principles
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- Financial Reporting
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- Accounting Scandals
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- IFRS vs US GAAP
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- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Balance Sheet
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- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
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- Revenue Reserve
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- Available for Sale for securities
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- Cash Equivalents
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- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Current Assets
- FIFO vs LIFO
- First In First Out (FIFO)
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- Accounts Receivables? | Definition, Accounting Examples
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- Net Tangible Assets | Calculate Net Tangible Assets Per Share
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- Impariment of Assets
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- Current Liabilities | List of Current Liabilities on Balance Sheet
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- Par Value of Stock
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- Retained Earnings (Formula, Examples) | How to Calculate?
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Owners Equity
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- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
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- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
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- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Cost of Goods Sold
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- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- EBITDA vs Operating Income
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- Amortization of Intangible Assets
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- Non Cash Expense
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- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
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- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- FOB Destination
- Explicit Cost
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- Accounting Careers
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- Forensic Accounting
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- Accounting vs Engineering
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- Accounting Firms in Australia
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- Accounting Books
source: Colgate SEC Filings
What is Par Value of Stock?
Par Value of stock (share) is the legal per share value that appears on the share certificates. This par value of stock is usually small ($0.01, $0.0001 etc) and is not connected to the market value of shares. Also, note that Par value of a stock is quite different than the par value of bond.
In the case of par value (bond), the par value is the issued price of the bond. On the other hand, for par value for stock, it’s the legal capital of the company.
Par Value Accounting
If a common stock is issued at $100 per share, a very meager amount of that is called par value of common stock. It’s just $0.10 or $0.01 per share or less. The rest of the amount would be treated as additional paid-in capital. For example, if we say that Company P has issued common stock at $100, the par value of stock of each share would be $0.01 per share and the additional paid-in capital would be $99.99 per share.
If we look at the par value accounting entry for the same, it would be the following –
- We will debit the “Cash Account”. Since cash is an asset and by receiving the money from the shareholders is an enhancement of the asset, cash would be debited.
- But the actual catch lies in the credit amount. We will credit “Common Stock Account” by $0.01 and also “Additional Paid-In Capital Account” by $99.99.
Why is par value of stock so low?
source: Starbucks SEC Filings
As we note from above, Starbucks par value of share is $0.001. There’s a particular reason behind the lowest price of par value of stock. Par value of stock is the minimum amount per share that has to be paid to purchase the share. That means the company will generate at least the capital that is the product of the par value of stock and the number of shares.
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Low par values of stock help companies avoid a contingent liability.
- If the shareholder pays less than the par value of common stock while purchasing the share and the company in future is unable to handle its financial obligations; then the shareholders have to the difference of what they should have paid (i.e. the par value per share) and what they actually paid.
- On the other hand, if the shareholders pay the par value share and in near future, the market price of the stock goes below the par value of stock, then the company has to pay the difference to the shareholders.
- To completely avoid these two extreme situations, companies issue shares at a very low (often lowest) par value, i.e. $0.01 per share.
However, the common stock can also have no par value. Let’s discover how no par value share works.
No par value of Share
We note from above that the China Marketing Media Holding has a no par value share.
- The only difference between a par value share and a no par value share is the minimum legalized amount. It is the minimum price that must be paid to acquire a share.
- In the case of par value share, a minimum base point is set up. And for no par value stock, no minimum base point is set up.
- Also, note that in the case of no par value share, there will be no additional paid-in capital. The whole amount would be transferred to the common stock.
The accounting entry for no par value stock would look like the following –
The whole amount that a shareholder will pay will be credited to a common stock account. Since there’s no base value set up, there will be no additional paid-in capital as well. And the entire amount would be debited to a cash account.
For example, let’s say that Company Q has issued no par value share at $100 each share. Now the following would be the entries –
Cash account A/C…. Dr $100 –
To Common Stock A/C – $100
Below is China Marketing Media Holding Shareholders Equity section from its 10Q.
Effect of Stock Split on Par Value of Share
Stock Splits are done typically to reduce the market value of the shares. The stock splits increases the number of stocks and proportionately reduces the part value of the stock.
Let us have a look at this stock split effect on par value of share. 90 Degree Corp has done a 2:1 stock split. Show the accounting entries
We note from above –
- 90 Degree Corp had 10,000 shares before the split and par value of share was $1.
- Post the 2:1 split, the number of shares increases to 20,000 and par value of share reduces to $0.5
- Please note that the common stock in both the cases (before and after the split) remains the same at $10,000.
Why should you know about par value of stock?
As an investor, you should know the nitty-gritty of the stocks you are investing in.
- It’s also important that you understand the concept of par value share and how much capital of a company is legal capital. You should also understand the difference between the par value (bonds) and the par value of stock so that you understand how to look at the actual issuing price of the stock.
- However, in a real sense, par value of common stock rarely affects your stock holding or how the stock will do in the market. But if you’re someone who would like to go in detail and want to find out how much a company contributes to its legal capital, you can look into their balance sheet and understand.
This has been a guide to what is Par Value of Stocks, its meaning along with practical examples? Here we also discuss, par value accounting, why par value is usually kept low and no par value stocks. You can also learn more about basic accounting from the following articles –