What Is Stock Accounting?

Jim B.

Stock accounting refers to the practice of a company or corporation providing documentation of all of the gains and losses it receives from issuing and buying back its own stock. All of these transactions must be recorded in accounting reports for accurate tax assessment. There are different stock issuances, including common stock, preferred stock, and treasury stock, which each have their own accounting rules attached. In addition, stock accounting also must take into consideration the value gained or lost when the market price of a stock changes from its initial stated price or par value.

Man climbing a rope
Man climbing a rope

A company that is attempting to raise funds for some sort of business undertaking may do so by issuing stock to investors. That stock essentially grants shares of ownership to all of the investors who purchase it. All of the money that changes hands during these transactions must be recorded by the company in question. Each specific type of stock comes with its own distinct set or rules. Companies must abide by these rules to perform proper stock accounting.

The type of stock in which most companies deal is common stock, which can be purchased through by regular investors on a stock exchange. Money received for the stock by the company goes into a debit account while the stock lost goes into a credit account. In this way, the balancing principle of stock accounting is achieved. This same practice occurs with preferred stock, which isn't sold on the open market but instead is sold to specific investors who receive regular dividend payments.

As investors know, prices of stock rise and fall depending on the activity of other investors. Any profits gained by the company from investors paying higher amounts than the initial issue price of the stock, also known as the par value, must be recorded in a separate debit account known as Additional Paid-In Capital. This is an important principle in stock accounting, since it reflects the price changes that occur due to market activity.

One other type of stock that comes into play during the process of stock accounting is treasury stock. Treasury stock is stock that the company has bought back from other common stockholders. The important thing to consider is that the legal status of treasury stock requires that it not be included as a financial asset. Any cash paid to buy treasury stock is entered as a credit for accounting purposes and is balanced out by a debit account listing the amount of treasury stock purchased.

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