Separate legal existence — what does it buy you?

The corporation acts in its own name, not the owners'. It signs the lease, it owns the truck, it carries the debt. Stockholders own shares of the company; they do not own the company's assets.

Limited liability of stockholders?

A stockholder can lose what they paid for the shares and no more. Creditors of the corporation have no claim on the personal assets of the owners — the single biggest advantage of the corporate form.

Transferable ownership rights?

Shares change hands freely without asking the corporation's permission and without disturbing its operations. The sale is between two investors; the company records only the change of name on the register.

Ability to acquire capital?

A corporation can raise money from thousands of people in small amounts, because shares are easy to buy, easy to sell and carry limited liability. No other form raises capital as easily.

The corporation's life is stated in its charter and continues regardless of the death, retirement or resignation of any owner or officer. Ownership changes; the entity does not.

Why is corporation management both an advantage and a disadvantage?

Advantage: professional managers who need not be owners run the business. Disadvantage: those managers may not own much of it, so their interests and the stockholders' can drift apart.

Government regulations — the corporate cost?

Corporations answer to state corporate law and, if publicly held, to the SEC: how shares may be issued, what must be disclosed, when dividends may be paid. The paperwork and compliance cost is real.

What is double taxation?

The corporation pays income tax on its earnings, and stockholders pay tax again on the dividends received from those same earnings. A proprietorship or partnership is taxed only once, on the owner's return.

Publicly held vs privately held?

A publicly held corporation's shares trade on an organized exchange and are available to anyone. A privately (closely) held corporation has few stockholders and does not offer its shares to the general public.

How is a corporation formed?

By filing an application with the state and receiving a charter (articles of incorporation). The corporation then adopts by-laws and, if it wishes, may operate in other states as well.

How are organization costs treated?

Legal and accounting fees, state filing fees and promotional costs of getting the corporation formed are EXPENSED as incurred — debit Organization Expense. They are not capitalized as an asset, because the future benefit cannot be measured.

The four rights of a common stockholder?

Vote for directors and on corporate actions; share in earnings through dividends; keep the same percentage of ownership when new shares are issued (the preemptive right); and share in assets on liquidation, after creditors and preferred stockholders.

The maximum number of shares the charter permits the corporation to issue. Authorization alone requires NO journal entry — nothing has happened yet, it is only permission.

Issued vs outstanding shares?

Issued shares are those the corporation has sold at some point. Outstanding shares are those currently held by stockholders: issued shares LESS treasury shares. Outstanding never exceeds issued, and issued never exceeds authorized.

An arbitrary amount per share set in the charter. It is not market value and not a measure of worth — its only job is to establish legal capital.

What is legal capital?

The amount that must be kept in the business for the protection of creditors — par value × shares issued. It is the reason the credit to Common Stock is always par times shares, never the price received.

No-par stock and stated value?

No-par stock has no par in the charter. The board may assign a STATED VALUE, which then plays par's role as legal capital, and the excess goes to Paid-in Capital in Excess of Stated Value. With no stated value at all, the entire proceeds go to Common Stock.

The rule for every issuance above par?

Two credits, always: par (or stated value) × shares to Common Stock, and every dollar above that to Paid-in Capital in Excess of Par. The debit is what was received.

Entry — issue common stock at par for cash?

Dr Cash for the proceeds / Cr Common Stock for the same amount. Price equals par, so there is no excess and only one credit.

Entry — issue common stock above par for cash?

Dr Cash (shares × price); Cr Common Stock (shares × par); Cr Paid-in Capital in Excess of Par (the difference). Example: 10,000 shares of $1 par at $5 → Cash 50,000, Common Stock 10,000, Excess 40,000.

Entry — no-par stock with a stated value?

Same shape as the par entry, one word changed: Dr Cash; Cr Common Stock (shares × stated value); Cr Paid-in Capital in Excess of Stated Value for the rest.

Is Paid-in Capital in Excess of Par a gain?

No. It is contributed capital — money the owners put in — it is simply not part of legal capital. A company never earns income by selling its own stock.

Issuing stock for services or noncash assets — which value?

Use the fair value of what is GIVEN UP or what is RECEIVED, whichever is more clearly determinable. For a closely held company that usually means the asset's fair value; for a publicly traded one, the market price of the stock.

How are stock issue costs recorded?

Underwriting, legal and accounting costs of the issue are netted against the proceeds: Dr Paid-in Capital in Excess of Par, Cr Cash. They are not an expense — the raise simply collected less than the market handed over.

Par value vs market value?

Par is a legal figure fixed in the charter; market value is what investors will pay today. The two are unrelated, and market is almost always the larger of the two.

What is preferred stock?

A class of stock with priority over common in dividends and in liquidation, usually without voting rights. It is recorded exactly like common: par × shares to Preferred Stock, the excess to Paid-in Capital in Excess of Par—Preferred.

The dividend preference?

Preferred stockholders are paid before common stockholders are paid anything at all. That is the first of preferred's two priorities.

The liquidation preference?

If the corporation is wound up, the order is creditors first, then preferred, then common with whatever survives. That is preferred's second priority.

Three names for one section?

Stockholders' equity, shareholders' equity and corporate capital all mean the same section of the balance sheet. Examiners switch between them in the middle of a question — never let the name move you.

The chain of control in a corporation?

Stockholders elect the board of directors; the board selects the officers; the officers run the business day to day. The TREASURER holds the funds and the CONTROLLER holds the records.

A DEBIT balance in Retained Earnings, left by a long enough run of losses. It is reported inside the stockholders' equity section as a deduction — never hidden anywhere else.

What is treasury stock?

Stock the corporation sold to shareholders once, bought back from them, and still holds without retiring. Four reasons the exam asks by name: to reissue to officers and employees under bonus and stock compensation plans; to increase the trading of the stock, signalling management thinks it is underpriced; to have shares available for acquiring other companies; and to reduce the shares outstanding and thereby raise earnings per share. A fifth, rarer: to buy out dissatisfied or hostile shareholders.

Entry — purchase of treasury stock (cost method)?

Dr Treasury Stock for the PRICE PAID to reacquire the shares / Cr Cash. Par value is irrelevant here: the account carries cost, not par.

Entry — resale of treasury stock ABOVE cost?

Dr Cash (proceeds); Cr Treasury Stock at COST; Cr Paid-in Capital from Treasury Stock for the difference. The excess is contributed capital, never a gain.

Entry — resale of treasury stock BELOW cost?

Dr Cash (proceeds); Dr Paid-in Capital from Treasury Stock for the shortfall, but only as far as its balance goes; Dr Retained Earnings for anything still left; Cr Treasury Stock at COST. Treasury Stock always leaves at cost.

Is treasury stock an asset?

No. A company cannot own itself. Treasury Stock is a DEDUCTION at the bottom of stockholders' equity, and treasury shares carry no vote and receive no dividend.

How does a treasury purchase affect shares and equity?

Issued shares are unchanged; OUTSTANDING shares fall by the number reacquired; total stockholders' equity falls by the cost paid.

The stockholders' equity section, top to bottom?

Paid-in capital — capital stock (Preferred Stock, Common Stock) then additional paid-in capital (the Excess accounts and Paid-in Capital from Treasury Stock) — giving total paid-in capital; plus Retained Earnings; less Treasury Stock; equals total stockholders' equity.

Contributed capital vs earned capital?

Contributed: Preferred Stock, Common Stock, Paid-in Capital in Excess of Par and Paid-in Capital from Treasury Stock — money owners put in. Earned: Retained Earnings — profit the business kept. Never mix the two buckets.

Back to Courses

Accounting 2 · Chapter 13 · Free

Chapter 13 — Corporations: Organization & Capital Stock

How a corporation is organized and funded — what shares and par value mean, how to record issuing common and preferred stock, treasury stock, and building the stockholders' equity section line by line.

Quiz Generator Practice Hub

What you'll learn

Describe the characteristics of a corporation and what par and no-par stock mean
Record the issuance of common and preferred stock, at and above par
Account for treasury stock purchases and reissuance
Build the stockholders' equity section of the balance sheet line by line

Lecture

Full lecture (multi-part)

Part 1 — What Is a Corporation? Shares & Par Value Explained

Part 2 — Stock Issuance Journal Entries: Common & Preferred Stock

Part 3 — Treasury Stock Explained with Examples

Part 4 — The Stockholders' Equity Section, Built Line by Line

Quick Review

Short recaps for fast review

Exam Cram — Stockholders' Equity in 13 Minutes

Practice this chapter

Test what stuck

Any chapters

Custom quiz

Build a custom quiz

Pick any chapters, choose the size, and we'll grade it — great for cumulative revision.

Build a custom quiz

Chapter downloads

How to get the most out of this chapter

Watch the full lecture above.
Take the Quick Quiz to test what stuck.
Work through the interactive practice exercises — check your answers and reveal the worked solution when you get stuck.
Run through the flashcards to lock in the key terms.
Sit the interactive mock exam end-to-end — no feedback until you submit.
Use the Quick Review / Exam Cram videos to lock it in before moving on.
When you're ready, move on to Chapter 14.

Get new chapters in your inbox →

Chapter 13 — Corporations: Organization & Capital Stock

Full lecture (multi-part)

Short recaps for fast review

Test what stuck

Quick Quiz

Worked Exercises

Mock Exam

Flashcards

One-page summary

Build a custom quiz