Stock is an investment in a company. When stockholders purchase stock, they are purchasing a partial ownership of the company, called stockholders' equity. The amount of stock sold affects stockholders' equity; however, selling stock does not affect a company's net income because the sale is recorded as a debit in one place and a credit in the other.
Debit and Credit
If a company sells stock, the company accountant lists the sale as a debit to the company's cash. For example, if a company sells $4,000 worth of stock, the accountant lists a debit of $4,000 under the cash column. However, the net income doesn't increase because the accountant also lists a credit of $4,000 under the entry for common stock. Thus, the stock value and the cash value balance each other out.
If a company sells stock for more than the stock is currently worth -- for example, if the stock is currently worth $5 per share but the company sells it for $10 per share -- the company lists the profit as excess capital. This does not change the net income on the balance statement, however, because the excess capital is listed as a debit and the shares of stock sold are listed as a credit, as with ordinary sale of stock.
Sometimes a company will buy stock back from stockholders. The shares of stock it buys back are called treasury stock. The business' accountant lists the value of the stock as a debit and records a credit to cash in the amount of the stock's value. Thus, purchasing treasury stock does not affect the company's balance sheet.
Transactions Between Stockholders
If a stockholder purchases stock from a company, any further transactions the stockholder performs on the stock do not affect stockholder equity. For example, if a stockholder sells the stock, it does not affect the stockholder equity of the company. If the company buys or sells stock, it affects equity but doesn't increase the net income on the balance statement.
- CliffsNotes: Accounting for Stock Transactions
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Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.