Corporations sell shares of common stock to raise money for future growth opportunities. Each issued share represents partial ownership and entitles common stockholders to receive dividends when the company issues them.
When a company wants to know the sum of common stock, it uses the asset accounts, liability accounts and select stockholder equity accounts.
What Is Common Stock in Accounting?
Common stock represents ownership in a company that is measured in shares. As the name suggests, it represents the most common type of stock. If only one type of stock is issued by a company, then it will be common stock held by common shareholders.
The alternative is preferred stock, which differs from common stock in being higher on the payment hierarchy. Often, common stock is any stock that is not preferred for dividend payments or liquidation. While common stock does not guarantee dividend payments, owners of common stock are entitled to dividends when the company pays them, per Cornell Law.
Stock Valuation
Keep in mind, the sum of common stock is not the same as the market value of common stock on a company’s balance sheet. What will be recorded is the par value. Anything above par value is recorded as additional paid-in capital. The value of the common stock reported on the balance sheet comes from the money received when the company sold the stock.
The stock's market value depends on its current market price as it is sold on the stock market. Several factors influence stocks' market value, including global conditions and market volatility.
Where to Find Common Stock on the Balance Sheet
Companies report the value of common stock issued in the stockholder equity section of the balance sheet. The value of common stock appears in two accounts on financial statements. These accounts include common stock and paid-in capital on common stock.
Common stock is recorded as a general ledger account. Authorized shares are the total shares available that can legally be sold per the articles of incorporation. Issued shares are the number of shares that are held by shareholders. Outstanding shares are issued shares minus those held in treasury after buyback. EPS, or earnings per share, can be calculated by dividing net profit by outstanding shares.
Treasury stock is comprised of retained shares from buybacks. Retained earnings are another major feature of this section. This is the amount of profit not paid out as dividends. These items are all reported on the balance sheet and will be found in the stockholders' equity section.
What Is the Formula for Common Stock?
The common stock formula can be expressed in the following way:
Outstanding Shares = Issued Shares – Treasury Shares
This formula will identify the number of outstanding shares. That number will change and fluctuate over time. The formula can be executed fairly easily using an Excel spreadsheet in order to derive other metrics. The number of outstanding shares is necessary to calculate market capitalization, EPS and cash flow per share (CFPS).
This information usually is relatively easy to obtain by reviewing a company’s 10-K or 10-Q. Corporations are required to disclose all of their financial reporting to the Securities and Exchange Commission (SEC). The general public may access filings through the SEC EDGAR search tool.
Accumulated retained earnings, contributed surplus, share capital and adjustments to equity will total the shareholders’ equity of the firm, also known as the company’s book value of equity.
According to the Corporate Finance Institute, stockholder equity can be calculated by slightly reconfiguring the basic accounting formula. Stockholder equity can be solved in the following way:
Stockholders Equity = Assets – Liabilities
To calculate retained earnings, deduct the company’s liabilities from assets to find stockholder equity. Next, take the stockholder equity and subtract common stock. Accumulated retained earnings, contributed surplus, share capital and adjustments to equity will total the shareholders’ equity of the firm, also known as the company’s book value of equity.
