 In this presentation, we will take a look at a journal entry for a transaction for a corporation issuing stock for cash. We're going to go through a scenario which will look like this. We have the information up top. We're going to record a journal entry for it in the general journal. Then we'll post that to a trial balance so we can see a quick result of what will happen. So we're going to post it to this trial balance worksheet over here. We are formatted in terms of cash. Our only asset is going to be a very small trial balance, but we want to see something in balance, record it, see the effect on the accounting equation as well as individual accounts. We have assets and liabilities in orange. We have the equity, light blue, revenue and expenses, the dark blue. The zero here represents that the positive numbers on this form of our debits, the negative numbers are credits and therefore debits minus the credits equal zero, debits therefore equal credits. Net income is zero because there's no revenue or expense on this current trial balance. We're going to have a transaction of the issuing of stock. So we're going to issue stock from the corporation. It's important first to note that this is different from trading stock. So when we buy stock or when we sell stock, particularly when we buy stock, it might be thought that we're buying that from the corporation. We're not typically, if we buy stock such as Apple or Google, we are typically buying it from others who are just selling the stock. That's the beauty of stock. It's interchangeable. When the corporation issues stock, they often do that on the initial offering when we start the corporation because that will be a way to generate capital from investors or periodically from time to time later on in the process. But note that the issuing of stock isn't something that happens all the time. It's something that, like when we start a business, we issue stock and if we were to start a sole proprietor, we would put our own capital into the business or a partnership would put their own money into the business. For a corporation, the stockholders put their own money into the business and they do so by buying stock. So it's the same kind of process there. What's happening is the owners, the stockholders are putting money into the business in order to have an equity interest in the business decision making interest within the business in a similar format as any type of business would when we start the business in order to get that initial investment to get the business going. Once we have that initial investment, then hopefully the company makes money and we don't have a lot more investment from the owners who have payments from the owners from the company in the form of a corporation, those would be dividends. So this is going to be us investing in the company. We're going to issue 20,000 shares from the company. We have a $5 par value and we're going to issue them for $10. So remember the goal here is basically to get capital typically. So we're trying to generate revenue so we can have operational money to use later on within the business. So cash is affected, cash is going to be increasing. We issue 20,000 shares. The tricky part here is that how much are we going to, which one of these are we going to use? The $5 par or the $10 market price? Why are there two? Which one are we going to use? When we sell the stock, we're going to sell it for whatever the price is on the market. So just like anything, we're going to get whatever we can for it. So the cash is going to go up with a debit. Cash is a debit balance account. We're going to do the same thing, increase it with a debit. The calculation will be 20,000 shares times the market price, $10. And just remember when we're talking about cash, the cash compartment of our selling of our stock, we're going to get whatever we want, whatever we can for it on the market. This will almost always be the market price higher than the par value price. Then what's going to be the other side of this? Well, if we were investing in a sole proprietor or a partnership, the other side would be some type of capital account in the equity section. Same thing here. It's going to be in the equity section, but we're not going to call it a capital account because unlike a partnership, we're not going to try to list all the owners of the corporation. The beauty of a corporation is that all of the shares are the same. The only difference between the owners is how many shares they own. So that's the great thing about it. It's all standardized. So we're not going to list out like people's names here of who we owe as we would with a partnership. What we're going to do instead is list out the common stock and then the retained earnings are the main two components. So the common stock represents us putting money into the business. The retained earnings represents the business accumulating revenue over the process of the business over and above the initial investment, less anything that was given back out to the owners in the form of dividends, which are similar to draws for a sole proprietor. So we're going to be up here. We're working up here. Now we have these two things up here. This is confusing. We have the common stock with a par value and then we've got the paid in capital. Why do we have two things representing the investment here? Well, that's because the par value is going to be a standardized number. This par value $5, the $5 is just an arbitrary number. We like made it up out of nowhere. Why would we make up a number? Because it standardizes this number. This number now is very standardized. This number represents whatever it is divided by 5 will be how many shares are outstanding. That's what the par value will do. It'll make this very standardized. What is this account then? Everything over and above what we got paid for the issuance of stock over and above the par value. This number will make no real sense over time because the market price will change and therefore there's no real relationship between the paid in capital and the number of shares outstanding because it just depends on when we issued the stock because the market price will change. But this one is very uniform because we're using a par value. So this one's going to have to go up. We're still going to credit equity just like we would for a sole proprietor or partnership but we're first going to credit the common stock par value and we're going to credit that for in this case 100,000. How are we getting that? We're going to take the 20,000 shares we issued times the par value $5, the smaller number. It's almost always going to be, it's pretty much always going to be smaller than the market price. So we're going to increase that by 100,000 and then the difference is going to go to paid in capital which is just the 200,000 minus the 100,000 or whatever we need the plug to make this in balance to make the credits equal to the debits. So this number is like we say it has no real uniformity. This number is just whatever we need to do in order to balance this thing out. If we post it then cash is going to go up. That's the point of issuing the stock. We're giving an equity investment to some owners that basically have some owning potential giving them some voting rights. They have the ability to influence the company in some ways and the right to receive dividends when they are declared in order in exchange for the cash. So cash is going up and then we're going to record that we owe these people money not by name but by increasing the common stock that we issued 500,000 plus 100. Note it doesn't really matter for the corporation who owns it. We'll determine that when we make the distributions in terms of dividends and whatnot but as far as the financial statements go, it doesn't matter. We don't need to list who owns the stock. Whoever owns it, it's fine. They're all the same. Stocks are all the same. So we're just going to say, hey, we issued 20,000 more. It's increasing the common stock by 100,000 to the 600,000. And then we can just easily know how many shares are out there because we can say, okay, it's at 600,000 divided by the par value or five. There's 120,000 shares out there. The financial statements, again, don't show us who owns them right now. The notes could tell us that but the financial statements themselves don't tell us who owns the shares but we know how many shares are out there and if we own any share, they'll all be uniform in terms of our voting rights for each in particular share and for the amount of dividends that we're going to get and what we should get upon liquidation of the company. We're going to increase the paid in capital. This 100,000 increase in the 60. So the 60 is going up by 100,000 to 160,000. So here's our total transaction. This then is what has been invested over the life. This is what had been invested first. This is not the initial offering. Otherwise this would be, you know, these would be zero and it would go up so there had already been stocks that were issued in the past. We are increasing it here. This account being very uniform because we're increasing it just by the par value times the number of shares and this one is a number that is going to be anything over and above that. Again, in total, this just represents the investment by the owners, investment by stockholders. As opposed to this number retained earnings which is going to represent the earnings that have been accumulated over and above the initial investment. It's important for our corporation to keep those separate because when we make distributions and things like that we don't want to take it out of the initial investment. We want to take it out of our earnings. We want to pay people for the earnings. We want to pay people after performance of the corporation after the corporation earns revenue. We want to take those revenues and pay it out. We don't typically want to pay back the initial investment. If we do, it might be treated differently for things like taxes. So if we go over here to the stockholders equity section of the financial statements, we can see the format that the stockholders equity will take. It's often a bit confusing to look at the stockholders equity section. It can be intimidating at first, especially if we're dealing with a partnership that doesn't have a lot of partners or a sole proprietor where we only have one equity account. Just remember when we're dealing with a corporation it's all the same. If we took this number in total, it's just the same thing. That's how much if we owe if one person owned all the stock corporation, then in essence we would owe them $600,000 plus $160,000 plus $658,000 the $1,418,000. Just like we would with a sole proprietor. Same as the assets, $1438,000 minus $20,000 will be that $1418,000. Assets minus liabilities equals that total equity section. The only difference with the corporation is we're going to break it out by the initial investment, the stock that was purchased versus the earnings of the life of the business. In the equity section we're going to say this is stockholders equity on like a financial statement. We're going to say this is the common stock. We will list that it's a $5 par value and we'll tell how many shares are out authorized. This means how many shares basically they're allowed legally to issue. They could issue 150 shares. However, only 120,000 shares are issued and outstanding. Which again we can clearly see on the financials if there's a par value by taking this number 600,000 divided by the $5, the 120 is the number of shares outstanding. And then we're going to have the amount 600,000. Then the paid in capital is the 160. All that represents is how much we got paid over and above the par value. The par value is just an arbitrary number. The 600 plus the 160 or the 760 is what we actually got paid for selling our stock. And then the retained earnings is going to be this component and that's just going to be the amount of earnings that have accumulated over the life of the business less anything that's been taken out in the form of draws. The 760 and the 658 is the $1,418. This representing the total value of equity if there's only one owner it would be like we would owe that one stockholder the $1,418,000. This representing in other words the book value of the company also representing assets minus liabilities in the same way as any type of entity would a sole proprietor or a partnership with still the total capital is the total capital in essence it's the book value of the company.