What is Stock Accounting?
Stock Accounting refers to recording the transaction entered into by the business enterprise from the point of investments made by anyone i.e. whether a body corporate or individual in the company in exchange of issue of something in return which could be easily traded in the open market.
Explanation
- Stock is of two types. One is the inventories which we hold to be traded or being utilized for some other produced finished goods. The other is shares, also known as stock. In this article, we are going to discuss various aspects of the second type of stock i.e., shares.
- Every business needs funds to operate its business effectively. So to manage such funds, some business chooses the option of issuing stocks in the open market. They raise funds by way of allotment of stock against the money received from the investors.
- After that, the process of recording the transaction of receiving the money from the public at large and issuing them the stock certificateStock CertificateStock Certificate, also called a Share Certificate, is a legal document evidencing the ownership of stocks in a Company, including details like the stockholder’s name, issuing date, the total number of stocks issued, identification number, and the corporate seal & sign. read more is known as Stock Accounting.
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For eg:
Source: Stock Accounting (wallstreetmojo.com)
Types of Stock Accounting
- The company issues stocks against cash. I.e., cash will be received by the company, and the investor will receive a stock certificate.
- In this option, stocks were issued for consideration, which is other than cash. i.e., issuing stock for taking some services, etc.
- The last type is issuing stock for purchasing some existing stock issued in the market. In other words, to repurchase the stock issued earlier new stock is going to be an issue.
Stock Accounting Entries
As discussed above, there are three types of stock for which we have to pass the recording entries, which are as follows:
#1 – Where Stocks are Issued for Cash
In the case where stocks are issued for cash, then to record the transaction following two entries need to be journalized in the books of accounts:
*In a case where the stock is issued at a price higher than the nominal value of a share.
#2 – Where Stocks are Issued for Consideration Other than Cash
In a case where stocks are issued for consideration other than cash, then to record the transaction following two entries need to be journalized in the books of accounts:
*In a case where the stock is issued at a price higher than the nominal value of a share.
#3 – Where Stocks are Issued for Purchasing Our Stock
In a case where stocks are issued for purchasing our stock issued earlier, then to record the transaction following entry needs to be journalized in the books of accounts:
How to Record Stock?
Let us understand the recording of stock with an example, company A wants to issue stock amounting to $100,000 comprises of 10,000 stock of $10 each on 01.04.2020 and to issue stock certificates to the applicants on 10.04.2020, then to record such transaction in the books of accounts following entries are to be passed:
On date 01.04.2020:
Then on date 10.04.2020, to allow the stock applied entry would be:
Benefits
#1 – Helps in decision making of Management
From the information which is compiled in the stock account, register management or decision making team could easily gather the data without making any such efforts.
#2 – Helps Management to reconcile and provide data to the lenders as and when required
The Lenders and the management as well need to analyze the financial position of an entity before taking any decision, the proper accounting of stock helps in analyzing the amount which the company has raised by way of stock issuance.
#3 – All Compliances Decisions
The entity earns and declares a dividendDeclares A DividendDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more to the stockholders then they need to pay some taxes levied thereupon, to analyze such amount and to timely comply with the regulatory guidelines one has to observe stock records.
#4 – Goodwill/ Capital Reserve
When someone wants to take over the business, then for the valuation of goodwillValuation Of GoodwillGoodwill valuation is the systematic evaluation of the goodwill of the company to be shown in the balance of the company under the head intangible assets and top methods to value include Average Profits Method, Capitalization Method, weighted average profit method and the Super Profits Method.read more or capital reserveCapital ReserveCapital reserve is a reserve that is formed from the company's profits earned from its non-operating activities during a period of time and is retained for the purpose of financing the company's long-term projects or writing off its capital expenses in the future.read more, one needs to analyze the stock accounts as the permission of stockholders is required.
Conclusion
Stock Accounting is simply a grouped or compiled form of all the transactions which were transacted over a set period whether they are economical or not of the stock of the company which we can easily compare with the records to analyze the funds raised and their utilization for the sake of earning maximum possible benefits thereupon.
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This article has been a guide to what is stock accounting and its definition. Here we discuss types, journal entries, and how to record stock along with its benefits. you may learn more about financing from the following articles –
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