Accounting for Issuing Shares
Like getting a loan, or issuing bonds (debt), issuing shares is a way that corporations can raise cash to finance the operations of their business. When a corporation issues new shares the company will typically hire an "underwriter" (typically a bank) to value the shares. Underwriters will often agree to purchase the new issue from the corporation at a fixed price, and will take on the risk of selling the shares to the general market. The net amount that the underwriter provides the firm for the new shares is credited to common or preferred shares.
Shares Sold on a Subscription Basis
In some cases shares may be sold on a subscription basis. This means that the shares have been ordered by a potential shareholder but will be paid in installments, and the share will not be issued until the full payment is made. Share subscriptions are often used by businesses to encourage employees to take part in ownership. When a subscription is received, an equity account ("Common Shares Subscribed") and a contra-equity account ("Subscriptions Receivable") are created.
When an installment payment is made, the receivable account is credited and cash is debited.
When the final installment payment is made, the shares are issued. An accounting entry is made to show that the shares have been issued and are no longer simply "subscribed".
Costs of Issuing Shares
The costs associated directly with the new share issues should be used to reduce the amount of paid in capital that is recorded, rather than expenses as an operating expense for the period.1 Indirect costs such as management salaries should be expensed normally since the exact relationship between the use of managements time and the transaction will likely be difficult to establish.
1. FASB ASC 505-10-25-2
Accounting for Issuing Shares
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